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
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 ...
Can you build a bond ladder with ETFs? ›
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 tips bond ladder? ›
This strategy involves building a TIPS ladder, i.e., buying a number of individual inflation-protected US Treasury bonds that separately mature over the coming years. Locking in a stream of real income payments in retirement via a TIPS ladder can both safely cover your fixed spending and create a living standard floor.
Are bond ladders better than bond ETFs? ›
Bond Ladders. The liquidity and transparency of an ETF offers advantages over a passively held bond ladder. 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.
Should I buy tips in 2024? ›
TIPS may be a sound investment to protect against inflation, but they're not wealth-building tools like stocks. March 22, 2024, at 3:47 p.m. If you're worried about inflation, TIPS can be a good choice – just don't count on them for big gains.
Do bond ladders really work? ›
Research finds that bond laddering delivers comparable gains as reinvesting bonds each year—with reduced volatility and less downside.
Why not to invest in bond ETFs? ›
Disadvantages of Investing in Bond ETFs
Credit risk: Bond ETFs hold a portfolio of bonds, and the credit quality of these bonds can vary. If the ETF holds bonds with lower credit ratings, it may be exposed to higher credit risk. Defaults or downgrades of the underlying bonds can have an impact on the ETF's performance.
What is the downside to tips bonds? ›
Cons of TIPS
Lower Yield Compared to Other Bonds: TIPS typically offer lower yields compared to other types of bonds. This is because they tend to carry less risk (because they are issued by the government). Inflation Adjustment Taxation: One significant disadvantage of TIPS is the taxation of inflation adjustments.
Is tips better than I bond? ›
Bottom line. If inflation and investment safety are your chief concerns — TIPS and I-bonds deliver both. TIPS offer greater liquidity and the higher yearly limit allows you to stash far more cash in TIPS than I-bonds. If you're saving for education, I-bonds may be the way to go.
Should I build a tips ladder? ›
There's a way for retirees to get guaranteed cash flow of more than 4% off their retirement portfolio, no matter how the market performs or how much inflation rises: Invest in a 30-year TIPS ladder. Like a conventional bond ladder, an investor can create a staggered portfolio of TIPS that mature at regular intervals.
The types of bonds used in a bond ladder can vary, but they often include U.S. Treasurys, municipal bonds and corporate bonds. These bonds are selected based on their credit quality, interest rates and maturity dates to create a diversified portfolio that best fits the investor's financial goals and risk tolerance.
Does Schwab have a bond ladder tool? ›
The CD & Treasury Ladder Builder allows you to easily search, build, and purchase a laddered portfolio of CDs and Treasuries to help you meet your individual investing objectives. On Step 1, you'll choose to begin with a predefined or custom ladder, select your account, and initial investment.
Should I buy bonds directly or through an ETF? ›
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.
Are tips a good investment for retirees? ›
By using TIPS to cover your fixed spending and lock-in a desired living-standard floor in retirement, you can safely invest in stocks for their potential upside. The lower you set your living standard floor, the greater is your potential upside, and vice versa.
Are tips good in a recession? ›
TIPS allows you to park your cash during a recession and help preserve its value. The face value of TIPS goes up or down with inflation or deflation. During a non-inflationary time, your investment earns the interest rate offered when purchased.
What is the real yield of tips for 5 years? ›
UST 5-Yr. TIPS US5YTIPS:Exchange
- Yield Open2.092%
- Yield Day High2.109%
- Yield Day Low2.091%
- Yield Prev Close2.06%
- Price100.0938.
- Price Change+0.203.
- Price Change %-0.20%
- Price Prev Close100.2969.
With bond laddering, you invest in multiple bonds with different maturities. As each bond or CD matures, you can reinvest the principal in new bonds with the longest term you originally chose for your ladder. If interest rates move higher, you can reinvest at higher rates.
How to build a bond ladder vanguard? ›
When you consider constructing a bond ladder, picture a real ladder. Each rung of the ladder represents a bond. As each bond matures, you can reinvest the principal at current interest rates. Say your ladder has bonds that mature in 2, 4, 6, 8, and 10 years.
Are ETFs available on bond indexes? ›
Bond ETFs allow ordinary investors to gain passive exposure to benchmark bond indices in an inexpensive way. Bond ETFs are available for a variety of bond categories, including Treasuries, corporates, convertibles, and floating-rate bonds.
