Blackrock recently launched a suite of exchange-traded funds that make it easy to invest in Treasury inflation-protected securities (government bonds that move in step with inflation and pay a fixed coupon rate on top) of different maturities. All of the 10 new iShares iBonds ETFs — so-called target-maturity funds — come due in different years and sport target dates that range between 2024 and 2033.
Target-maturity ETFs aren’t new; Blackrock and Invesco started offering them nearly a decade ago. But the earlier versions focus on corporate, municipal or Treasury bonds, which don’t adjust with inflation.
By eliminating the hassles of buying individual bonds, these ETFs make it easy to build a bond ladder, which involves spreading your investments among bonds with staggered maturities — the ladder “rungs.” The goal is to provide steady income or minimize interest rate risk (bond prices and interest rates move in opposite directions). As bonds mature, you reinvest the proceeds in a rung further up the maturity line, spend the cash or invest it elsewhere.
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TIPS may be timely given current inflation rates. Kiplinger expects inflation to average 2.4% by late 2024 (which is a smidge below its 30-year average). Inflation-protected securities work differently than traditional Treasuries.
The principal, or face value, of TIPS, which are issued with five-, 10- and 30-year maturities, rises or falls monthly in step with the consumer price index. On top of that, TIPS pay a fixed rate of interest, or coupon rate, every six months. As of October 31, a 10-year TIPS had a yield of 2.5%. By contrast, the standard 10-year Treasury yielded 4.9%.
Target-maturity funds need some explaining, too. The iShares iBonds Oct 2024 Term TIPS ETF (symbol IBIA), for example, holds TIPS that come due between January 2024 and mid October 2024. Interest payouts are made quarterly. As the portfolio’s bonds mature, the proceeds are reinvested into October-dated bonds or held in a money market fund within the ETF. On October 15, 2024, the ETF will officially close and return all of the capital to shareholders.
It’s best to buy and hold these funds to maturity. Each of the 10 funds charge a 0.10% expense ratio, and all sport a yield of at least 6% or better. But those yields include both interest income and inflation adjustments to the principal.
Blackrock likes to say these investments “mature like a bond and trade like a stock.” You can buy shares in the ETFs for as little as the price of one share or less if your broker offers fractional-share purchases. That’s less than the $1,000 minimum to buy Treasuries on most broker platforms, as well as the $100 minimum outlay required to buy the securities directly from TreasuryDirect.gov.
And you can reinvest your interest income and buy more shares in the ETF. “I’m a fan of TIPS ladders. And if you like TIPS ladders, you’ll like these funds,” says Morningstar’s John Rekenthaler.
Whether you hold TIPS directly or invest through an ETF, the tax implications are the same: Interest payments are exempt from state and local taxes, but you’ll owe federal income tax on interest income and inflation adjustments to the principal — due in the tax year they occur, even if you don’t sell the bond — if you hold these assets in a taxable account.
Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you makehere.
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FAQs
The unique features of iShares iBonds ETFs can help you more easily build bond ladders, pick points on the yield curve, or even match expected cash flow needs in the future.
What is the difference between a bond ladder ETF and a bond ETF? ›
Bond ETFs offer instant diversification and a constant duration, which means an investor needs to make only one trade to get a fixed-income portfolio up and running. A bond ladder, which requires buying individual bonds, does not offer this luxury.
Are tips ETFs a good investment? ›
As inflation rises, the value of TIPS bonds increases, as does the net asset value (NAV) of the ETF. TIPS ETFs can be a good fixed-income option for investors to hedge inflation risk.
Are bond ladders a good idea? ›
SHARE YOUR THOUGHTS
The verdict: The bond-laddering portfolio provides more-stable returns over various interest-rate environments. For instance, if you go with the short-term portfolio option you may secure 7.5% a year if rates go up, or you could wind up with 2.5% a year if rates decrease.
Should I buy tips in 2024? ›
As you can see, the 2023 yields were about 30 basis points higher than today's elevated levels. October 2023 was a great month for building a ladder of TIPS investments, with all maturities yielding close to 2.5% above inflation. April 2024, in fact, is also an opportune time for making new TIPS investments.
Is it better to buy bonds or bond ETFs? ›
For many investors, investing in the right bond funds can be a better option than holding a portfolio of individual bonds. Bond ETFs can provide better diversification — often for a lower cost — can offer higher liquidity, and can be easier to implement.
How do bond ladder ETFs work? ›
In a typical bond ladder, each holding would be the same size with maturity dates arriving at regular intervals. As bonds in a laddered portfolio mature, the cash distribution is either used to cover lifestyle needs or reinvested in new bonds at the longest maturity of the ladder at the current market interest rate.
What is the best bond ETF? ›
- Vanguard Short-Term Bond ETF (BSV)
- Vanguard Intermediate-Term Bond ETF (BIV)
- Vanguard Long-Term Bond ETF (BLV)
- iShares MBS ETF (MBB)
- iShares 0-3 Month Treasury Bond ETF (SGOV)
- iShares Aaa - A Rated Corporate Bond ETF (QLTA)
- SPDR Bloomberg High Yield Bond ETF (JNK)
- Pimco Active Bond ETF (BOND)
iBonds ETFs are an innovative suite of bond ETFs that have a fixed maturity date. An iBond ETF holds a diversified basket of bonds with similar maturity dates, and distributes a final pay out at maturity.
What are the downsides of tips? ›
TIPS typically pay lower interest rates than other securities, so they aren't the best choice for an investor with a fixed income. TIPS also comes with an interest rate risk. During deflation, the investor will either lose the interest earned or not earn anything.
TIPS are a smart option to keep up with rising inflation and invest during a recession. With traditional bonds, you are locked into a fixed rate of return for the bond's life. With stocks, you are at the mercy of the overall market.
Is there a downside to investing in ETFs? ›
Disadvantages of ETFs. Although ETFs are generally cheaper than other lower-risk investment options (such as mutual funds) they are not free. ETFs are traded on the stock exchange like an individual stock, which means that investors may have to pay a real or virtual broker in order to facilitate the trade.
What are the disadvantages of bond laddering? ›
In addition, since a bond ladder strategy typically doesn't include financial analysis on the issuing company, it's difficult for the investor to assess the risk-reward opportunity of each bond investment. Bond ladder investors don't look under the hood, which is another reason why they can have higher default risk.
What is the disadvantage of laddering? ›
One potential disadvantage of laddering fixed-income investments is that you need a lot of capital invested this way to provide meaningful income because the yields are low.
What are the risks of bond laddering? ›
However, investors looking for a higher yield, without reducing the credit quality, usually need to purchase a bond with a longer maturity. Doing so exposes the investor to three types of risk: interest rate risk, credit risk, and liquidity risk.
What are the benefits of a bond ladder ETF? ›
A bond ladder may lower interest rate risk and reinvestment risk while giving the investor predictable cash flow. A fixed income ETF may be easier and less expensive than constructing a bond ladder, with the potential for greater diversification, price transparency, liquidity, and payment frequency.
How much money do you need to build a bond ladder? ›
The money needed to start a ladder that would have at least five rungs is usually at least $10,000. If you don't have this recommended amount, purchasing products such as bond funds may be more sensible, as the charges related to the product will be offset by the benefits of diversification they provide.
Are ETFs good for bonds? ›
Bottom line. Bond ETFs really can provide a lot of value for investors, allowing you to quickly diversify a portfolio by buying just one or two securities. But investors need to minimize the downsides such as a high expense ratio, which can really cut into returns when interest rates are low.
