How to use iBonds like a pro

Term-maturity bond ETFs are a convenient, flexible way to target time-specific goals, especially when rates are uncertain.

Interest rates continue to hover at super-low levels, adding to uncertainty for bond investors. Among the worries: A turnaround in rates could lower the value of existing holdings.

Holding bonds to maturity is one strategy to help seek a potential positive return on a fixed income portfolio even when rates change. Unless the issuer defaults, investors should get back their principal investment at the end of the term, in addition to income over the life of the security.

For the average person, however, managing a portfolio of individual bonds has some challenges.  Which bond sector looks attractive – Treasuries, municipals or corporates?  How do you select an issuer? What are your expectations for interest rates? How do you reinvest the coupons?  How do you diversify across issuers or sectors, and monitor credit? Are you getting the best price?

All these decisions can make it hard to confidently choose individual bonds to meet specific goals. Term-maturity bond ETFs are designed to help investors access professional management while still maintaining control. iShares launched the first of such ETFs, known as iBonds, a decade ago. Among their key features:

  • Mature like a bond: The bonds in each ETF all mature in the same calendar year. When the last bond matures, the iBonds ETF will terminate and the final cash amount will be repaid to shareholders.
  • Trade like a stock: As an ETF, iBonds are traded on the stock exchange, so you can bypass the over-the-counter bond market.
  • Diversified like a fund: Each iBonds ETF holds many individual bonds, so you can pick the calendar year and sector.

How investors use iBonds ETFs

Investors can use iBonds ETF in many of the same ways that they use individual bonds.

  • Build a more efficient bond ladder – Investors can use bond ladders as a way to manage an uncertain rate environment, by holding bonds that mature in consecutive years and reinvesting proceeds into new bonds. iBonds make it easy to build a ladder without picking the individual bonds; for example, one could gain corporate exposure by allocating corporate iBonds ETFs across different maturities.
  • Match outgoing cash flows – Let’s say you’re planning to buy a vacation home in three years or pay your grandkid’s college tuition over the next four years. iBonds ETFs offer a way to seek additional potential income while allocating to maturity dates aligned with the time when you’ll need the money.
  • Reinvest coupons or called bonds – Investors can use iBonds in conjunction with individual bonds to put coupons or calls to work. Instead of hunting for odd lots of small bonds, they could consider sweeping the extra cash into a corresponding iBond.

Choices across sectors

iBonds ETFs are now available in U.S. Treasuries, municipals, investment grade and high yield corporates, making it easy to customize a diversified bond portfolio.

Check out the iBonds laddering tool.

Karen Schenone, CFA, is a Fixed Income Product Strategist within BlackRock’s Global Fixed Income Group and a regular contributor to The Blog.

Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses which may be obtained by visiting www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing. Investing involves risk, including possible loss of principal.

Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments. Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.

When comparing stocks or bonds and iShares Funds, it should be remembered that management fees associated with fund investments, like iShares Funds, are not borne by investors in individual stocks or bonds. Buying and selling shares of iShares Funds will result in brokerage commissions.

The iShares® iBonds® ETFs (“Funds”) will terminate on or about March 31 or December 15 of the year in each Fund’s name. An investment in the Fund(s) is not guaranteed, and an investor may experience losses, including near or at the termination date. Unlike a direct investment in a bond that has a level coupon payment and a fixed payment at maturity, the Fund(s) will make distributions of income that vary over time. In the final months of each Fund’s operation, as the bonds it holds mature, its portfolio will transition to cash and cash-like instruments. As a result, its yield will tend to move toward prevailing money market rates, and may be lower than the yields of the bonds previously held by the Fund and lower than prevailing yields in the bond market. As the Fund approaches its termination date, its holdings of money market or similar funds may increase, causing the Fund to incur the fees and expenses of these funds.

Following the Fund’s termination date, the Fund will distribute substantially all of its net assets, after deduction of any liabilities, to then-current investors without further notice and will no longer be listed or traded. The Funds’ distributions and liquidation proceeds are not predictable at the time of investment and the Funds do not seek to return any predetermined amount.

The rate of Fund distribution payments may adversely affect the tax characterization of an investor’s returns from an investment in the Fund relative to a direct investment in bonds. If the amount an investor receives as liquidation proceeds upon the Fund’s termination is higher or lower than the investor’s cost basis, the investor may experience a gain or loss for tax purposes.

There may be less information on the financial condition of municipal issuers than for public corporations. The market for municipal bonds may be less liquid than for taxable bonds. Some investors may be subject to federal or state income taxes or the Alternative Minimum Tax (AMT). Capital gains distributions, if any, are taxable.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of February 2020 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

Diversification and asset allocation may not protect against market risk or loss of principal.

The Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).

The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Barclays,Bloomberg Finance L.P., or Dow Jones nor do these companies make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with the companies listed above.

©2020 BlackRock. iSHARES, iBONDS, and BLACKROCK are registered trademarks of BlackRock. All other marks are the property of their respective owners.

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