Investors Shift From T-Bills to Distributing Ladder ETFs

Some investors are shifting cash from short-term Treasury bills into distributing ladder ETFs such as Northern Trust’s 2035 Tax-Exempt Distributing Ladder ETF (MUNB).

Short-term Treasury bills are used as low-volatility cash strategies, but they create reinvestment risk for investors with multi-year goals. Money placed in rolling three-month T-bills must be reinvested many times over a decade, and the timing gaps between rollovers can cause variation in funding outcomes.

MUNB constructs a laddered portfolio of municipal bonds with a separate maturity rung in each year through 2035. When a bond in the ladder matures, the ETF distributes the principal to shareholders on an annual schedule instead of reinvesting that principal into later rungs. The fund also pays tax-exempt income from municipal securities.

The underlying portfolio is composed of municipal bonds selected for credit quality. The fund does not guarantee return of principal. ETF shares trade on exchanges at market prices rather than at net asset value, and the fund’s net asset value can decline as income and principal distributions are paid.

Investors can still lose principal. ETFs have no legal obligation to return a specific principal amount at a future date in the way an individual bond does. Brokerage commissions and market price changes affect returns.

Financial advisers and planners comparing short-term Treasury allocations with distributing ladder ETFs evaluate tax treatment, credit quality, liquidity and the effect of periodic distributions on portfolio NAV. The fund prospectus contains information on objectives, risks, charges and expenses and should be reviewed before investing.

Distributing ladder ETFs provide an annual principal schedule that aligns maturities with specific target years, and represent an alternative to repeatedly rolling short-term securities for investors funding multi-year obligations such as retirement or education.