Bond Ladder vs Bond Fund: Duration, Cost and Cash Flow

Key takeaways

• Priced on the Bank of England's gilt curve for 8 September 2026, an equal-weight ladder of ten gilts maturing in one to ten years carries 4.61 years of modified duration.
• iShares Core UK Gilts, a £4.14bn tracker charging 0.07% a year, reported an effective duration of 7.11 years. The ladder isn't rate-proof, it's shorter.
• Daily moves in the one-year and ten-year gilt spot rate correlated 0.800 across 252 trading days to 28 August 2026. Ten rungs behave close to one bet.
• The same ten-rung structure locked in 4.98% a year on 8 September 2026 and 0.949% on 4 January 2022. Certainty runs in both directions.
• Ten deals at £6.95 each cost £69.50 once. The tracker's 0.07% costs £70 a year on £100,000, or £700 across a decade.

The ladder isn't safer than the fund, it's shorter

Should you build a bond ladder or just buy a bond fund? The case for the ladder is that every rung matures on a date you picked and hands back its face value, while a fund has no maturity date at all. That part is true. What it doesn't establish is that the ladder carries less interest rate risk, because how much it carries is set by where you put the rungs, not by the wrapper you put them in.

Take the Bank of England's nominal gilt curve for 8 September 2026 and price an equal-weight ladder: £10,000 into each of ten gilts, one maturing in each of the next ten years. The rungs run from a one-year spot rate of 4.2252% to a ten-year rate of 5.1626%. The ladder's modified duration, roughly the percentage its value moves for a one point shift in yields, works out at 4.61 years.

Now the fund. iShares Core UK Gilts holds 70 gilts across the conventional gilt market. Its August 2026 factsheet reports an effective duration of 7.11 years and a total expense ratio of 0.07%. That is 54% more rate exposure than the ladder, from the same asset, in the same currency, backed by the same issuer.

None of that gap comes from the structure. It comes from where the rungs stop. Push the ladder out to twenty years and its duration rises to 7.42 years, past the fund's. Pull the fund in and you get the same manager's 0-5yr gilt tracker: identical 0.07% charge, 19 holdings, effective duration 2.26 years. Duration is a choice about maturities, and both structures let you make it.

Bond ladder vs bond fund: what a rate move costs each one

On £100,000, using those durations, a parallel one point rise in gilt yields takes roughly £4,610 off the ladder and roughly £7,110 off the fund. The gap is £2,500. A fall of the same size does the reverse. Neither figure is a forecast. It's the first-order price sensitivity each portfolio carried on 8 September 2026, and the ladder's is smaller only because its rungs are nearer. The mechanics of that price move are set out in our note on bond duration.

Calendar year 2022 is the live test. The all-stocks gilt tracker returned -23.83%. The 0-5yr version returned -4.45%. Same manager, same fee, same government, same wrapper. The difference was duration.

The loss ratio there is wider than today's duration ratio, and the reason matters. Bond fund duration isn't a constant. It rises as yields fall, because when the discount rate is low a larger share of a bond's present value sits in the distant principal payment. On 4 January 2022 the ten-year gilt spot rate was 1.084%. The 7.11 years iShares reports for August 2026 is not the number that index carried going into 2022.

The curve move itself was not the explanation. Over 2022 the one-year gilt spot rate rose 295 basis points and the ten-year rose 265, so the short end moved further, not less. A basis point is one hundredth of a percentage point. The short fund lost less because it held less duration, not because it was spared the move.

What the rungs actually buy is a dated schedule

Here's what the ladder does that a fund can't. Every rung has a contractual payment date and a contractual amount. Priced off the 8 September 2026 curve, a £100,000 ladder of ten par gilts returns cash on this schedule, counting the coupons from every rung still alive plus the principal from the one maturing that year.

Those amounts are known on the day you buy. They don't depend on what gilt yields do next, only on the gilts paying. That is cash flow matching, and it's the one property a fund genuinely cannot replicate, because a fund's value on any future date is whatever the market says it is that morning.

The certainty is nominal, though, not real. £10,514 in year ten is £10,514, whatever a pound buys by then. A schedule fixed in purchasing power means index-linked gilts, which carry their own indexation lag and their own price behaviour.

Ten rungs are not ten bets

A gilt ladder is often sold as diversification: ten holdings instead of one. The daily data disagrees. Across 252 daily changes in the UK nominal gilt spot curve, from 1 September 2025 to 28 August 2026, the rungs moved almost as one.

Adjacent rungs are close to the same instrument: three-year and five-year changes correlated 0.985. The widest pair in the table, one year against twenty, still came in at 0.691. Inside the one-to-ten span an ordinary ladder occupies, the lowest figure is 0.800. Equal-weighting ten rungs doesn't spread the risk across ten sources. It averages one source sampled at ten points along a curve.

The chart above plots that decay against the one-year rung, and the fund sits in exactly the same position, as does any gilt-only portfolio. Measured correlations also drift between regimes, which is a separate problem set out in our piece on correlation instability.

The visible cost gap is £69.50 once against £70 a year

Building the ladder means ten separate purchases. Hargreaves Lansdown's published rate is £6.95 per online deal for an account that placed 0 to 19 trades in the previous month, and the page states that this "covers shares, investment trusts, exchange-traded funds, gilts and bonds". Ten rungs is £69.50, paid once.

The fund charges 0.07% a year. On £100,000 that's £70 in year one, and £700 across a decade if the balance stays flat. So the ladder's entire build cost is about one year of the fund's fee, and over ten years the published costs are £69.50 against £700.

That comparison flatters the ladder, and the reason is what it leaves out. A dealing charge is not the whole cost of buying a gilt. You also pay the dealer's spread between the price you buy at and the price you could sell at, and that is not published in the standardised way a total expense ratio is. The fund's 0.07% is disclosed and standardised. The ladder's all-in cost is neither. Platform charges land on both, so they largely cancel, and our comparison of platform fees covers where that stops being true.

The tax gap is bigger than the fee gap, and it vanishes inside an ISA

Outside a shelter, the two are taxed differently. GOV.UK lists "UK government gilts and Premium Bonds" among the assets you do not pay Capital Gains Tax on, a rule in force as at September 2026. Buy a low-coupon gilt below par, hold it to maturity, and the pull towards par is a capital gain that isn't taxed. The coupons remain taxable as savings income.

A bond fund doesn't get that treatment. HMRC's manual says an authorised fund makes an interest distribution rather than a dividend distribution when, "at all times throughout the distribution period the market value of its qualifying investments exceeds 60% of all its investments". A fund holding only gilts clears that threshold by construction. For an offshore reporting fund, which is what both trackers above are, each Irish-domiciled with UK reporting status, HMRC's guidance is that where a fund "holds more than 60% of assets in interest-bearing (or economically similar) form, any distribution or excess of reported income is treated as a payment of yearly interest".

Both routes put the whole return in the savings box, where the 2026 to 2027 English rates are 40% at higher rate and 45% at additional rate. So outside an ISA or a pension the ladder's edge isn't the 0.07%. It's that part of its return arrives as a gain HMRC doesn't tax at all. Inside an ISA or a SIPP none of this touches either one, and the comparison collapses back to duration and cost. Which holdings earn the shelter is the subject of our piece on asset location.

The strongest case against the ladder is that it locks in the bad rate too

The usual objection to funds is that the fund holder is at the mercy of the market and the ladder holder isn't. Run the same structure at two different moments and you can price what that's worth.

An equal-weight ten-rung ladder of gilt strips, £10,000 a rung, priced off the Bank of England curve for 8 September 2026, locks in 4.98% a year and returns £132,126 on £100,000 across the decade. The identical structure priced on 4 January 2022 locked in 0.949% and returned £105,385. That's the counter-argument in one line. Certainty is symmetric, and the 2022 buyer was exactly as certain of 0.949% as the 2026 buyer is of 4.98%.

The fund holder took the mark-to-market hit in 2022 and then owned a portfolio yielding whatever the market yields now: iShares reported a yield to worst of 4.92% for August 2026. The ladder holder from January 2022 still holds rungs struck at 2022 rates, and getting to today's rates means selling them below what they cost. Neither position is safe. They are differently shaped.

A rolling ladder is a bond fund you run yourself

A ladder that gets rebuilt rather than spent behaves differently again. Reinvest each maturing rung at the far end and the ladder stays ten rungs deep indefinitely, so the duration stops falling. It sits near 4.61 years permanently, which is a constant-maturity portfolio, and that is close to what a bond index tracker does.

At that point a rolling ladder and a short-dated gilt fund are the same strategy run by different people, with the same reinvestment risk inside both. Every maturing rung has to go back into the market at whatever rate exists that day, which is precisely the exposure the ladder was supposed to remove. The cash-flow certainty only survives if the rungs are actually being spent, so the argument holds for a portfolio being drawn down and does not hold for one being built up.

What this evidence cannot tell you

Start with the sample. The correlation table covers 252 daily changes to 28 August 2026, one curve regime in one market. It isn't a claim about how gilt rungs co-move across decades, and a correlation measured over a single year is a weak guide to any other year.

The ladder figures are arithmetic rather than history. They come off one day's fitted curve, and the Bank's curve is a model estimated from traded gilt prices, not a set of prices you can deal at. Real gilts trade rich or cheap to it. The 4.61 years also assumes ten par gilts at exactly one-year spacing, which is a modelling convenience rather than a shopping list.

The fund figures are one manager's disclosure on one date. Effective duration and yield to worst follow BlackRock's own conventions, and the factsheet defines the second as "the weighted average of fund's individual bond holding YTMs based upon Net Asset Value", which is not the return an investor earns. Calendar year 2022 is a single year, and the worst of the ten on that factsheet. These limitations cut both ways, and none of them is repaired by choosing the other structure.

The tax section describes UK rules as they stood in September 2026. Rules change, thresholds move, Scotland differs, and none of it reaches inside an ISA or a pension.

What would change the conclusion

If gilt dealing spreads were published the way fund charges are, the cost question would become answerable. As things stand the ladder's £69.50 is the part you can see and the spread is the part you can't, so anyone calling the ladder cheaper is comparing a complete number with a partial one.

If the curve inverted sharply, the arithmetic flips. On 8 September 2026 gilt spot rates rose from 4.2252% at one year to 5.1626% at ten, so shortening duration costs yield. When short rates sit above long ones, a one-to-ten ladder can out-yield a longer fund and shorten duration at the same time, and the trade-off described here stops existing.

If your rungs aren't gilts, the correlation table doesn't transfer. Corporate bonds carry credit risk that doesn't move with the gilt curve, so ten corporate rungs from ten issuers really are closer to ten bets than ten gilt rungs are. That is the version of the ladder argument with a genuine diversification claim behind it, and it is not the version most people are shown. What the extra yield is paying for is set out in our note on credit spreads.

The number to watch when weighing a bond ladder against a bond fund isn't the wrapper. It's the duration you end up holding, whichever route gets you there, and whether the dates your money comes back match the dates you need it.