Automated Bond Ladders

What is a bond ladder?

A bond ladder is a portfolio of bonds with varying maturities, designed to minimize your exposure to interest rate fluctuations — in any rate environment. A bond ladder can be composed of different types of bonds. Treasuries, municipal bonds, and corporate bonds are examples of common types of bonds that can be used to build a ladder.

Bond ladders include monthly “rungs,” like steps in the ladder. Each rung represents one or more bonds that mature over time at certain intervals. As those bonds, or rungs, mature, you’ll get your principal back, which can then be reinvested into existing or new rungs.

Thus, a bond ladder can offer predictable cash flow through interest payments and maturing principal, with reduced interest rate risk compared to buying one individual bond. In other words, it can be a great way to earn a steady yield — and preserve your principal — over a long period of time.

How does Wealthfront’s Automated Bond Ladder work?

Wealthfront’s Automated Bond Ladder is composed entirely of US Treasuries (a mix of bills and notes), which offers principal protection as long as the Treasuries are held to maturity. Our Automated Bond Ladder can help you take home a higher yield than holding funds in cash, while safeguarding your principal. We'll compare hundreds of Treasuries to prioritize high coupon payments and liquidity, and keep your ladder balanced as they mature. You can personalize your ladder by indicating the ladder length you want. We’ll handle all the buying and reinvesting according to your preferences. 

How does Wealthfront buy treasuries?

We’ll invest your deposit evenly across all rungs in your ladder. If you don’t have enough to buy all rungs, we’ll spread your deposit out as evenly as possible to support diversification. 

We aim to invest in your bond ladder by buying bonds with maturity dates starting around the 15th of the next month. If a bond is too close to maturity, it may have low market liquidity, leading to a higher purchase price and a lower yield, which we try to avoid. Thus, when new funds are added or reinvested, we may purchase a different bond rung to maintain a balanced ladder instead of reinvesting in the first rung. Even in these cases, the total number of rungs will remain within your ladder length.

How are treasuries treated from a tax perspective?

Interest income from Treasury securities is subject to federal income tax but exempt from state and local taxes. This is especially advantageous for clients with high state tax rates. 

What customization options are available?

When setting up an Automated Bond Ladder, you can customize the longest maturity period in your ladder by choosing the ladder length. The length of your ladder is determined by the bond with the longest maturity (the longest rung).The longest rung refers to the Treasury with the longest maturity period in your ladder. This determines the number of rungs it contains since your ladder is designed to have one rung mature per month. The ladder length options range from 6 months to 6 years, and we plan to offer even longer durations in the future. 

What is automatic reinvesting? Can I turn it off?

With our automatic reinvesting feature, we automatically reinvest interest payments and principal from matured Treasuries to buy new Treasuries at market price, extending your Automated Bond Ladder by one rung each month. As this cycle continues, you’ll benefit from compounding interest. 

You can turn off reinvesting from your Automated Bond Ladder “Manage” page. When reinvesting is off, you can decide how you want to use the funds (interest payments and principal from matured Treasuries). You can either automatically withdraw the funds each month or, in the near future, you can keep funds invested in your ladder until a target withdrawal date.

If you automatically withdraw the funds each month, the monthly amount you withdraw will not be reinvested in your ladder. We'll send interest payments and principal to your selected Wealthfront Cash Account each month. Clients might choose this option to earn a steady income. When all bonds have matured, we’ll automatically close your Automated Bond Ladder account.

If you keep funds invested in your ladder until a target withdrawal date, you’ll still receive some benefits from compounding interest since the interest payments and principal will be reinvested until we get close to your target date. As the target date nears, we’ll make sure Treasuries mature in time to automatically transfer your remaining interest payments and principal to your selected Wealthfront Cash Account. After funds are transferred, we’ll close your Automated Bond Ladder Account. Clients might choose this option to access their full principal by a target withdrawal date because it’s a good option when saving for a big expense.

Is there a fee?

Yes, we charge our standard 0.25% annual advisory fee. This fee will be waived for your first 6 months on your first Automated Bond Ladder account. Note that the average yields we display for Automated Bond Ladder accounts are net of our standard advisory fee.

What are the terms of the fee waiver?

For a limited time, Wealthfront Advisers, LLC (“Wealthfront Advisers”) will waive its standard advisory fee of 0.25% annually on the balance in your first Automated Bond Ladder account for six (6) months from the date on which the account is first opened.  The fee waiver will be applied beginning on the first day on which your account contains a balance, and will be applied for six (6) months from the account opening date.  This fee waiver offer is only available for a client’s first Automated Bond Ladder account and cannot be applied to any other Wealthfront accounts.  This offer is available to all prospective first-time Automated Bond Ladder account holders, including clients who have previously participated in other Wealthfront account opening promotions.  If you have previously opened or held an Automated Bond Ladder account (including jointly with another person), you are not eligible to receive a fee waiver through this offer. 

Clients who opened an Automated Bond Ladder account on or before June 30, 2024, were eligible to receive a similar six-month fee waiver through a separate offer; participants in that offer are ineligible to receive a fee waiver through this offer.  If you close your Automated Bond Ladder account during the fee waiver period, you will forfeit the remainder of your fee waiver and will not be eligible to receive a new or replacement fee waiver.  Your fee waiver will be reflected in your monthly statement. Average yields for the Automated Bond Ladder reflect the deduction of Wealthfront’s standard 0.25% advisory fee.  Wealthfront Advisers reserves the right to modify or discontinue this offer at any time without notice. Wealthfront Advisers has no obligation to open an account for any particular person and may accept or decline an application in its sole discretion.  Eligibility decisions will be made by Wealthfront Advisers in its sole discretion.

Is there a minimum deposit requirement?

The minimum is $500 for the initial deposit and $100 for additional deposits. 

Can I withdraw money at any time?

Yes, you can easily request a withdrawal on our app or website. Withdrawals typically take 2-3 business days to complete. Please note that selling a Treasury before it reaches maturity could result in a loss to principal. 

Is there any fee for withdrawing my money early?

No. Unlike a CD, you can easily withdraw your money at any time. However, in order to earn the full yield from your Automated Bond Ladder, you’ll need to hold it to maturity. If you sell a Treasury before it reaches maturity, you could lose some of your principal.

How is the Automated Bond Ladder different from the Automated Bond Portfolio of ETFs?

 The big difference between the Automated Bond Ladder and the Automated Bond Portfolio: the two involve different types of portfolio investments and different risk profiles.

• Automated Bond Ladder focuses on preserving your principal while earning interest by investing in Treasuries. A ladder of US Treasuries that mature at different times gives you steady cash flow over the length of your ladder. Compared to our Automated Bond Portfolio, it’s designed to protect your principal as long as you’re able to hold the Treasuries until maturity.
• Automated Bond Portfolio aims for higher returns but comes with more risk since it consists of bond ETFs that include corporate bonds. Compared to our Automated Bond Ladder, most bond ETFs do not hold bonds to maturity and hence are not aimed to preserve principal. However, if you’re okay with a little more risk, there is the potential to earn more.

How do I know if this product is right for me?

The Automated Bond Ladder is designed for investors who want to earn a steady yield with very little risk. A ladder can be a great way to save for important expenses down the road, like a down payment, a child’s tuition or a soonish retirement.If you're OK with more risk for potentially higher returns, then the Automated Bond Portfolio might be a better fit.

How does this compare to a CD ladder?

While there are some similarities to CD ladders, here are a few key differences:

• Tax treatment: Interest earned from Treasury bonds are exempt from state and local income taxes, whereas interest earned from CDs are taxed at the ordinary rate without any tax exemptions.
• Flexibility to withdraw funds: With our Automated Bond Ladder, you can withdraw funds at any time. It’s possible you may lose some principal if you withdraw early and the price of the Treasuries has decreased, but it’s also possible you won’t lose principal. On the contrary, with CDs, many of them have penalties where you are guaranteed to lose money if you withdraw funds early.
• Insurance: US Treasuries offer very little risk when held to maturity and are backed by the full faith and credit of the US government. CDs, however, often come with FDIC insurance.

Can I have multiple bond ladder accounts?

Yes, you can open multiple Automated Bond Ladder Accounts.

Still have questions? Read more about bond ladders in our Automated Bond Ladder Whitepaper.