Climbing The Ladder: A Review of iBonds
Have you ever considered matching bond cash flows with a life event, such as buying a house or covering kids’ tuition fees, using an ETF?
iBonds act like regular Bonds. The ETF will mature, and you will be repaid at a predetermined date. However, they offer several ETF advantages over regular bonds – they trade like stocks, are diversified, and don’t require high investment amounts to get started.
So, who should buy them, and how do they work?
KEY TAKEAWAYS
- For Short to Medium-Term Goals – iBonds are available in two maturities – Dec 2026 and Dec 2028. It can fund your child’s 2027 tuition, or a 2029 retirement project.
- Available in EUR and USD – Four iBonds ETFs were issued in August 2023. For each maturity, you can choose between EUR or USD.
- Higher Yields – iBonds invest in Corporate Bonds with pickup over Government Bonds, except in their last year when they are rebalanced into French OATs and German Bunds, or US Treasuries.
- Advantages over Regular Bonds – iBonds offer diversification, liquidity, and a lower investment threshold. All trade on Xetra. USD Funds also trade on LSE and Euronext, and EUR Funds – on Borsa Italiana. USD funds can also be accumulating and used in UK’s ISAs and SIPPs.
- Low Commercial Risk – iBonds for professionals were launched in Europe in 2015. Despite low demand, BlackRock allowed funds to mature as planned in 2018.
- ESG Exclusions – We generally don’t like ESG products. Yields may be marginally affected due to (i) business activity and (ii) United Nations Global Compact exclusions. A strong mitigating factor is the lack of reliance on flawed MSCI ESG Ratings.
- Securities Lending – We prefer avoiding security lending, but the mitigating factors are revenue sharing and a borrower default indemnity provided by BlackRock.
Here is the full analysis
What etfs are available?
In August 2023, BlackRock issued four iBonds ETFs:
- iShares iBonds Dec 2026 Term $ Corp UCITS ETF
- iShares iBonds Dec 2026 Term € Corp UCITS ETF
- iShares iBonds Dec 2028 Term $ Corp UCITS ETF
- iShares iBonds Dec 2028 Term € Corp UCITS ETF
Should you consider theM?
Potentially suitable
potentially NOT Suitable
-
You have a short to medium term goal -
You want a Fairly predictable return -
You want to match future expenses -
You want corporate bonds to increase yield
-
You want bonds for the long run -
You save for expenses in unknown amounts and/or unknown time horizons e.g. retirement -
You need government bonds for portfolio rebalancing
Who Are iBonds Funds For?
-
You have a short to medium term goal -
You want a Fairly predictable return -
You want to match future expenses -
You want corporate bonds to increase yield
When May iBonds NOT Be Suitable?
-
You want bonds for the long run -
You save for expenses in unknown amounts and/or unknown time horizons e.g. retirement -
You need government bonds for portfolio rebalancing
How to use ibonds to fund your lifestyle
Paying a Tuition fee
A one-off payment in 2027
Let’s say you want to fund your child’s tuition in four years from now. Here is how you can think about it:
- How Much You Need: Today’s invested amount plus the return from bonds will match the 2027 expense.
- Buy the ETF maturing before: Here, iBonds maturing in December 2026 would be the closest. Then, you can park the cash with a Bank for a couple of months.
- Reinvest the Interest: Distributing ETFs pay interest. Even though the coupon is much lower than the yield, consider reinvesting the interest payments.
funding retirement PLANS
Two payments in 2027 and 2029
But, you may also want to fund two retirement goals – for example, an adventure in 2027 and helping your kid kickstart his business in 2029:
- Allocate : Determine exactly how much money you will need in 2027, and then in 2029.
- Select Your ETF: Choose the iBonds maturing before – here December 2026 and 2028.
- Reinvest the Interest: Again, consider reinvesting the interest payments.
Creating a Bond Ladder
funding all retirement Needs
You probably see where I am going with this. If iBonds get more traction, and more maturities are available, you could fund your retirement lifestyle for years to come. It works the same way.
How do they compare with Regular ETFs?
3 major differences with regular bond etfs
#1 The ETF will Mature
Unlike most Bond ETFs, iShares iBonds have a distinct maturity date. It’s in the name of the fund. Regular Bond ETFs roll Bonds to maintain roughly the same maturity profile and duration. iBonds collateral matures within 12 months of the ETF closure, when the principal is paid back to the investor. The Funds will be de-listed from the Stock Exchanges by January 2027 or January 2029.
#2 The Collateral changes in the last year
But what happens to the collateral that matures 10 or 6 months before the Bond ETF Maturity? In the final year of an iBonds ETF, the Fund starts transitioning its holdings from corporate bonds to US Treasuries, for a USD fund and Bunds or French OATs for a EUR fund. It’s a carefully orchestrated manoeuvre designed to ensure the fund’s value remains steady as it approaches maturity.
#3 The ETF size doesn’t matter (that much)
For traditional ETFs, size matters—a lot. It comes with commercial risk of closure. For iShares iBonds ETF, size isn’t as paramount. BlackRock is unlikely to close them, even with low demand. The star of the show is the maturity date, and everything else plays second fiddle.
Full Comparison
Regular Bond ETFs vs ibonds
| Criteria | Regular Bond ETF | iShares iBonds |
|---|---|---|
| Build Bond Ladders | No | Yes |
| Rolling Maturities | Yes | No |
| Decreasing Duration | No | Yes |
| Return of Principal | No | At Maturity |
| Different collateral in last year | No | Yes – Govies |
| Liquidity | Traded on Exchanges | Traded on Exchanges |
| Diversification | Very High | High |
| Minimum Investment | Low | Low |
| Value Fluctuation | Yes – Visible | Yes – Visible |
| Management fees | ETF TER | ETF TER |
| Security Lending | Depends | Yes |
Source: Bankeronwheels.com. Data as of August 2023.
How Do they compare with REGULAR Bonds?
3 major differences with regular bondS
#1 iBonds Are Liquid
iBonds are traded on an exchange, making them much more liquid than regular bonds. Investors can sell out of iBonds, should their plans change. Regular bonds may require finding a buyer in the over-the-counter market, which can sometimes be challenging and time-consuming.
#2 iBonds Are Diversified
iBonds provide exposure to a diversified basket of bonds, rather than a single bond issuer. Each ETF has between 230 and 330 individual Bonds.
#3 iBonds Are Easier To Access
Buying and selling iBonds is as easy as trading stocks. Regular bonds, may require a minimum investment amount that could be prohibitive for some investors.
Full Comparison
Regular Bond ETFs vs ibonds
| Criteria | Single Corporate Bond | iShares iBonds |
|---|---|---|
| Build Bond Ladders | Yes | Yes |
| Decreasing Duration | Yes | Yes |
| Return of Principal | At Maturity | At Maturity |
| Different collateral in last year | No | Yes – Govies |
| Liquidity | Traded OTC | Traded on Exchanges |
| Diversification | Single Issuer Risk | High Diversification |
| Minimum Investment | Usually High | Low |
| Value Fluctuation | Yes – but Invisible | Yes – Visible |
| Management fees | No | ETF TER |
| Security Lending | No | Yes |
Source: Bankeronwheels.com. Data as of August 2023.
What else is different?
While iBonds have clear advantages over regular Bonds, there are a few things to keep in mind:
- Management fees – although they are very low for iBonds (0.12%)
- Different collateral – as mentioned, during its last year you’re exposed to another, safer, asset class – Government Bonds.
- Securities Lending – more on that below.
Have ibonds ever been tested?
Do iBonds Have A Track Record?
What About Europe?
In 2015, iBonds were issued in UCITS format for the first time. But they were only targetted towards professional investors. Despite interest in iBonds having fizzled out after the launch of a US investment-grade credit fund in 2015, it reached its liquidation date in 2018.No new iBonds were launched for European investors until now. This suggests that even when faced with low demand, BlackRock has a history of allowing funds to mature as planned rather than closing them prematurely.
What Return Can you Expect?
iBonds ETFs issued in August 2023
Return and Cost
| ETF | Currency | Maturity | Yield | TER | Duration | Coupon |
|---|---|---|---|---|---|---|
| Dec 2026 $ | USD | 31/12/2026 | 5.62% | 0.12% | 2.6 | 3.1% |
| Dec 2028 $ | USD | 31/12/2028 | 5.54% | 0.12% | 4.2 | 4.2% |
| Dec 2026 € | EUR | 31/12/2026 | 4.02% | 0.12% | 2.7 | 1.7% |
| Dec 2028 € | EUR | 31/12/2028 | 4.04% | 0.12% | 4.5 | 1.8% |
Source: BlackRock, Bankeronwheels.com. Analytics as of 29th August 2023.
Few Quirks Of iBonds To Remember
- Yield-to-Maturity is a proxy – The above yields are a good indication of what you will earn. But, it’s not exactly Professional Liability Driven Investing (or LDI). Remember, in the last year, the Bonds will be gradually replaced with Government exposure, so yield in the final year will be determined by rates at that point in time. Duration is also calculated based on current portfolio composition.
- You will earn more than the coupons – The Yield-to-Maturity comprises coupons, paid quarterly, and appreciation of ETF price over time. Some of the underlying Bonds were issued a few years ago, in a much lower yield environment.
- Low coupons may be beneficial – A significant part of total return comes from price appreciation, reducing hassle of reinvesting and potential taxes/transaction fees. The difference between ETF Yield and Coupons from the Bonds is smaller for the USD Funds. Fortunately, for the USD funds, there are accumulating funds available.
What Credit Risks are you taking?
Overall Risk
- EUR iBonds have similar profiles – with c. 45% in BBB Bonds, the lowest Investment Grade rating category.
- 2028 USD iBonds are slightly riskier – with 56% in BBB category, while 2026 USD are the safest overall, with only 42% BBB.
EUR iBonds – Ratings
USD iBonds – Ratings
Country Exposure
- EUR iBonds have diversified profile – with more exposure to French issuers for 2028 vs. 2026 iBonds.
- USD iBonds exposed to the US – with marginal exposure to Japan, the UK and Canada.
EUR iBonds – Countries
USD iBonds – Countries
Industry Exposure
- EUR iBonds exposed to European Banks – like Credit Agricole, Credit Mutuel, or Rabobank, with other industries having more marginal impact.
- USD iBonds exposed to US Banks – like Barlcays, HSBC or Wells Fargo, particularly the 2026 vintage. 2028 has significant exposure to healthcare.
EUR iBonds – Industries
USD iBonds – Industries
What we don’t like about ibonds
ESG
But BlackRock’s stayed away from MSCI ESG Ratings
We spent a few months creating an apolitical, evidence-based guide to sustainable investing. We concluded that:
- ESG Ratings are not designed to protect the planet, but to protect corporate profits.
- On a Risk-adjusted basis, so looking past risk factors, ESG ETFs will, in the long run, inevitably underperform.
All iBonds include Sustainability considerations. For example, the iShares iBonds Dec 2026 Term $ Corp UCITS ETF tracks the Bloomberg MSCI December 2026 Maturity USD Corporate ESG Screened Index.
What does it mean? Bonds won’t finance issuers:
- From certain sectors – involved in tobacco, nuclear weapons, civilian firearms, thermal coal, oil sands, various weapons. This is SRI Investing, and not too problematic. Here is why.
- Involved in controversies – with low score or not compliant with United Nations Compact Principles. Again, this is not very problematic.
SecuritY Lending
But BlackRock’s Indemnity Mitigates the risks
All ETFs engage in Securities Lending, which is not a feature that we like in simple products for individual investors. Two considerations are worth highlighting:
- Most of the income will flow to the Investors – Income from securities lending is split between the Investors and the Asset Manager. Generally in the ETF Indusrty, income is split from 98% to Investors to 60/40 (Investors / Asset Manager). BlackRock is at the lower end of this scale, with 62.5% going to Investors and 37.5% retained by BlackRock.
- BlackRock provides an indemnity – for full replacement of the securities lent if the
collateral received does not cover the value of the securities loaned in the event of a borrower default.
Comparison of USD and EUR ETFs
What Are other Common Characteristics of EUR and USD ETFs?
- TER – All have an expense ratio of 0.12%
- Domicile – All are domiciled in Ireland
- No Currency Hedging – No currency hedged versions are available. Learn more about FX risk.
What are other differences between EUR and USD ETFs?
- Exposure in final year – USD ETFs will be exposed to US Treasuries, EUR ETFs to German Bunds and/or French OATs.
- Accumulating Share Classes – Only iShares iBonds USD are available in Accumulating Share Classes. Learn more about the difference.
- UK ISA/SIPP Eligibility – Only iShares iBonds USD are available for the UK tax wrappers.
Which Share Classes can I Choose From?
Dividends and trading Currencies
Dividend Distribution and Settlement Currency
| Stock Exchange | Distributing | Accumulating | IBonds Product |
|---|---|---|---|
| LSE | USD | USD | iShares iBonds $ Corp UCITS ETFs (26 &28) |
| Xetra | EUR | EUR | iShares iBonds $ Corp UCITS ETFs (26 &28) |
| Euronext Paris | – | EUR | iShares iBonds $ Corp UCITS ETFs (26 &28) |
| Xetra | EUR | – | iShares iBonds € Corp UCITS ETFs (26 & 28) |
| Borsa Italiana | EUR | – | iShares iBonds € Corp UCITS ETFs (26 & 28) |
Source: BlackRock, Bankeronwheels.com. Data as of August 2023.
How to find them
ISINs
| ETF | Distributing ISIN | Accumulating ISIN |
|---|---|---|
| Dec 2026 $ | IE0007UPSEA3 | IE000BWITBP9 |
| Dec 2028 $ | IE0000VITHT2 | IE0000UJ3480 |
| Dec 2026 € | IE000SIZJ2B2 | – |
| Dec 2028 € | IE000264WWY0 | – |
Source: BlackRock, Bankeronwheels.com. Analytics as of 29th August 2023.
A Game-Changer, If rates stay high.
The arrival of iBonds to Europe is potentially a game-changer, should yields stay high. As their popularity soars, the emergence of new fixed- maturity Bond ETFs from BlackRock and other Asset Managers could provide investors with Bond ETF ladders as another great tool in their ETF toolbox.
Will you Invest?
What about you? Do you think this is a good way of investing cash? Will you buy iBonds, or do you have better alternatives?
Good Luck and Keep’em* Rolling!
(* Wheels & Dividends)
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