Generating reliable income from your investments isn’t always simple. Markets move, interest rates change and payments can vary.

If you’re trying to build a steady income stream, you’ve probably noticed that many options come with trade-offs. It’s a common challenge, and it’s not always easy to navigate.

That’s where bond exchange-traded funds (ETFs) may help. These funds invest in a mix of bonds and offer exposure to regular interest payments. While they don’t guarantee income, they can play a role in a diversified portfolio.

One possible strategy for using them is called laddering. It’s a way to spread investments across bonds with different timeframes. Traditionally used with individual bonds, you can adapt laddering to also work with bond ETFs.

In this article, we’ll explore how bond ETF laddering works, where it might fit, and what to watch out for. You’ll find examples, common benefits, and the key trade-offs to consider, so you can weigh whether it’s worth exploring further.

What is a laddering strategy?

Laddering is a way of spreading bond investments across different timeframes. It was first used with individual bonds.

Here’s how it works. Say someone buys several bonds that mature at different times — some in one year, some in five, some in ten. As each bond matures, the money can be used or reinvested. This creates a steady rhythm of cash flow and can help manage changes in interest rates over time.

The main goal is not to lock all your money into one timeframe. By spreading maturity dates, you reduce the risk of needing to reinvest everything at once, especially if rates are low when that happens.

Some investors now use this strategy with bond ETFs. Instead of buying individual bonds, they invest in a mix of bond ETFs with different average durations — short-term, medium-term, and long-term. Each ETF holds many bonds with similar timeframes.

This approach shares the same goal: to help smooth out returns and manage timing risk . But it works a little differently. Unlike individual bonds, bond ETFs don’t have a fixed maturity date. They are ongoing funds that buy and sell bonds to stay within their target timeframe. And because ETFs are pooled investments, you’re not holding specific bonds yourself. Instead, you hold units in a fund that manages the bonds for you.

How bond ETF laddering works

Laddering with bond ETFs means spreading your investment across funds with different bond durations. Here's how that can work.

A simple example

Let’s say someone wants to create a three-part ladder using ETFs. They could divide their investment in equal portions between three bond ETFs.

• Short-term bond ETF – holds bonds that mature in 1 to 3 years
• Medium-term bond ETF – holds bonds that mature in 3 to 7 years
• Long-term bond ETF – holds bonds that mature in 7 to 10+ years

Each ETF focuses on a different segment of the bond market. While the bonds inside the ETF eventually mature, the fund itself keeps running, buying new bonds to maintain its target range.

Here’s how a basic ladder might look:

ETF type	Target bond duration	Purpose in ladder
Short-term	1–3 years	Provides liquidity and lower interest rate risk
Medium-term	3–7 years	Balances income and stability
Long-term	7–10+ years	May offer higher income potential, with more rate sensitivity

As time passes, the investor can monitor how each ETF performs and decide whether to keep the structure as is or shift the mix. If needed, they could reinvest from one ETF into another to maintain the ladder. This process continues, maintaining the ladder’s structure and providing regular access to maturing funds.

Where the income comes from

Bond ETFs can generate income in two main ways:

• Interest payments from the bonds held within the fund
• Capital gains or losses from selling bonds before maturity

Most bond ETFs pay out income regularly, often monthly or quarterly. These payments reflect the interest earned by the bonds in the portfolio. If the ETF sells a bond for more (or less) than it paid, the gain (or loss) can affect the fund’s overall returns.

Some investors choose to reinvest the income. Others may use it as part of a regular passive income stream. Either way, it's worth noting that payments can change depending on interest rates and market conditions.

Potential benefits of laddering bond ETFs

Laddering bond ETFs won’t suit everyone, but it can offer some useful features. Here’s a closer look at the potential benefits:

It helps manage interest rate risk

Spreading investments across short, medium and long-term bond ETFs can help manage duration risk. That’s the risk of bond prices moving when interest rates rise or fall.

Short-term bond ETFs tend to be less sensitive to rate changes. Long-term ones usually react more. By combining them, the overall exposure can feel more balanced.

This staggered approach won’t remove risk. However, it may help reduce the impact of sharp changes in interest rates over time. It also provides options — whether to stay the course, adjust the mix or use the income elsewhere.

It may lead to more stable income

Holding just one bond ETF means your income depends on that ETF’s performance and duration. A laddered approach adds variety. Income from different bond types may respond differently to rate changes. That variation might help reduce sharp changes in cash flow.

It can support long-term thinking

For investors who value structure, a ladder offers a clear way to manage bond exposure without guessing when to jump in or out. You don’t need to guess the “right” time to switch durations or adjust exposure.

A set structure can reduce decision fatigue and limit emotional investing in reaction to market news. Some investors find that sticking with a clear, repeatable process helps them stay focused, even when markets feel uncertain. It’s about creating a plan you feel comfortable managing over time.

Considerations and trade-offs

Though laddering bond ETFs may offer structure and flexibility, it’s not without trade-offs. Here’s what to consider before implementing this strategy.

Bond ETFs don’t mature

• Unlike individual bonds, bond ETFs don’t have a fixed maturity date.
• The fund continually buys and sells bonds to stay within its target duration range.
• This means there’s no set date when your investment returns a lump sum.
• You’re exposed to ongoing market conditions, not just a single maturity cycle.

Income is variable

• Bond ETF income can change over time.
• Payments depend on interest rates, bond turnover and how the ETF is managed .
• Some months may deliver higher distributions, while others may be lower.
• There’s no guarantee of a fixed return, even within the same ETF.

Market prices can move

• Bond ETFs are traded on the Australian Securities Exchange (ASX) and their prices fluctuate like shares.
• When interest rates rise, existing bonds often fall in value, which can lower the bond ETF’s price.
• The value of your units can rise or fall, regardless of the income paid.
• These price movements may matter more if you need to sell at a specific time.

Rebalancing may be needed

• Over time, the weight of each ETF in your ladder may shift.
• You might need to reinvest income or sell one ETF to restore your original mix.
• This doesn’t need to be done constantly, but some attention helps maintain the ladder.
• Without rebalancing , your exposure may drift away from your intended strategy.

Tax may apply

• Most bond ETF income is taxed as interest, which is typically taxed at your marginal rate .
• If you sell an ETF for more than you paid, you may also be liable for capital gains tax .
• Reinvesting income through a distribution reinvestment plan (DRP) doesn't avoid tax obligations.

Who might use a laddering strategy?

Bond ETF laddering might appeal to investors who focus on income and structure. Here are a few scenarios where the approach might fit:

Investors focused on income with some flexibility

A ladder can help provide regular income while still allowing access to capital through the ASX if needed. As mentioned, unlike holding individual bonds, there’s no need to manage each bond’s maturity or reinvestment schedule manually.

Retirees or pre-retirees managing drawdowns

For investors gradually drawing down their investments, timing can be tricky. A laddered ETF structure may help spread reinvestment decisions across different timeframes, reducing the need to make large decisions all at once.

People seeking a rules-based strategy

A set structure can offer a sense of control. Rather than reacting to every rate change or news headline, a ladder provides a clear plan. This approach may support more consistent behaviour over the long term.

Like any strategy, it comes with its potential downsides. But for investors wanting to blend structure, income and flexibility, it may be worth exploring.

Comparison to other income options

There are other investment strategies for generating income. Let’s look at how they compare to laddering bond ETFs:

Feature	Bond ETF laddering	Term deposits	Annuities	Individual bonds
Maturity date	No fixed maturity; ETFs are ongoing	Fixed term (e.g. 6 months, 1 year, 5 years)	May be fixed term or lifetime	Fixed maturity date (e.g. 5 or 10 years)
Income certainty	Variable; depends on interest rates and fund management	Fixed interest for the term	Regular payments (fixed or inflation-linked)	Predictable fixed interest if held to maturity
Access to capital	Can sell ETF units anytime on the ASX	Locked in for the term (may allow early withdrawal with penalty)	Often no access once annuity starts	Capital returned at maturity; limited access before then
Market exposure	Yes; ETF prices rise and fall with interest rate movements	No market exposure	No direct exposure to markets	Prices can fluctuate, but known value at maturity if held
Diversification	High; ETFs hold many bonds	None; tied to one institution	None; typically a contract with one provider	Low unless you hold many different bonds
Rebalancing needed	Occasionally, to maintain the ladder structure	No rebalancing required	No rebalancing required	May need to manage maturities and reinvest manually
Might suit	Investors seeking structure and flexibility with market exposure	Those wanting capital security and a known return	Those prioritising stable income and longevity protection	Those wanting known cash flows and are comfortable managing bonds

Each option serves a different purpose and carries its own risks and advantages. Understanding the differences can help you consider what feels most aligned with your goals, investing style and time horizon .

Using Australian bond ETFs

If you’re exploring a bond ETF ladder, it can help to understand what’s available locally. Here are a few examples of Australian bond ETFs that cover different durations and exposures:

• Vanguard Australian Fixed Interest Index ETF (VAF) – invests in a broad mix of Australian fixed interest securities
• Vanguard Australian Government Bond Index ETF (VGB) – focuses on Australian government bonds with high credit quality
• iShares Core Composite Bond ETF (IAF) – offers exposure to a composite index of Australian bonds across sectors
• iShares Treasury ETF (IGB) – targets Australian Commonwealth government bonds, with a focus on longer-term securities

These ETFs vary in several ways:

• Duration – the average time to maturity differs between short-, medium- and long-term funds
• Yield – income paid to investors depends on the bonds held and current interest rates
• Credit quality – some funds focus only on government bonds; others include corporate debt
• Index approach – each ETF tracks a different benchmark with its own rules

Feature	VAF	VGB	IAF	IGB
Duration	Medium-term (approx. 6–7 years)	Medium-term (approx. 5-6 years)	Medium-term (approx. 5–6 years)	Long-term (approx. 9–10 years)
Yield	Moderate yield, based on mix of government and corporate bonds	Lower yield, due to focus on government bonds with lower risk	Moderate yield, diversified bond mix	Typically lower yield, with more rate sensitivity
Credit quality	Mix of high and medium-grade bonds (government and corporate issuers)	High-quality bonds only (Australian Commonwealth and state governments)	Mix of government, semi-government, and corporate issuers	Very high-quality bonds (Australian Commonwealth government only)
Index approach	Tracks Bloomberg AusBond Composite 0+ Yr Index	Tracks Bloomberg AusBond Govt 0+ Yr Index	Tracks Bloomberg AusBond Composite 0+ Yr Index	Tracks Bloomberg AusBond Treasury 0+ Yr Index

These are just examples, not recommendations. It’s important to check the fund details and consider how each option aligns with your goals. Each ETF has its own structure and focus. The mix you choose (if you build a ladder) will influence your exposure to risk, income and duration.

Is bond ETF laddering right for you?

Laddering bond ETFs won’t be the right fit for every investor. But for those seeking more predictability, it offers a structured way to manage income and interest rate exposure.

If you value steady progress over chasing market moves, this strategy could offer a practical framework. It won’t remove uncertainty, but it may help you navigate it with more confidence and less stress.

You don’t need the perfect strategy, just one that fits your pace and supports your long-term goal.