7 Ways to use iBonds® ETFs to help your clients and your practice

• Today’s evolving interest rate environment presents an opportunity to revisit client portfolios.
• iBonds ETFs can be a versatile tool for clients with varying objectives.

With interest rates still at elevated levels¹ and the Fed likely to cut rates further, financial advisors still have an opportunity to revisit client portfolios, which BlackRock's analysis suggests are on average underweight duration and overweight cash.²

Whether your clients are investing in fixed-income for the first time or are seasoned pros, iBonds ETFs are a way for advisors to help clients solve some of today’s investing challenges -- and plan for tomorrow’s needs.

iBonds ETFs launched in 2010 with the goal of giving investors the look and feel of owning individual bonds through an ETF wrapper. Available in municipal, investment grade, U.S. Treasuries, high yield corporate, and U.S. TIPS, iBonds ETFs are term maturity ETFs made up of a diversified portfolio of individual bonds with three key features:

• Mature like a bond. Investors get the benefit of having a defined maturity similar to individual bonds. iBonds ETFs typically mature in October or December of their maturity year.
• Trade like a stock. Individual bonds can pose challenges with liquidity, credit research, trading costs and cash flow management. iBonds ETFs help investors bypass the over-the-counter (OTC) market where dealers come into the mix and instead, trade on a stock exchange. 
• Diversify like a fund. Each iBonds ETF is made up of many bonds, so investors get the diversification benefits that come with owning a fund.

Bond laddering. A common way to get started with iBonds ETFs is to build a bond ladder. This involves buying a series of bonds that mature in consecutive calendar years. When one iBonds ETF matures, advisors can use the cash proceeds to invest in the next available iBonds ETF, aka the next rung of the bond ladder. This strategy can help reduce clients’ interest rate risk and help keep them fully invested.

As illustrated below, if you’re setting-up a 5-year bond ladder for a client, you would buy five iBonds ETFs that mature between 2025 to 2029. Once the 2025 iBonds ETF matures, you can keep clients invested by buying a 2030 iBonds ETF with the proceeds. (Read more about how bond laddering can help boost client portfolios.)

Put cash to work. Many investors are taking advantage of the still-elevated short-term rates and allocating to cash-alternative strategies. What many investors may not realize is that money market fund performance has lagged stock and bond performance significantly over time. ³ History has shown us that in rate environments similar to the present day, cash has historically underperformed.⁴ If appropriate for your client, consider stepping out of cash and into an iBonds ETF to potentially generate higher yield.

Express a view on the yield curve. iBonds ETFs enable investors to target specific points along the curve where they see the most opportunity. Over time, yield curves do not always move in a parallel fashion, meaning interest rates may shift in different amounts on the front- versus the long-end of the curve. For example, if a Financial Advisor sees potential opportunity to capture a higher yield with the 1-year U.S. Treasury, they could allocate to an iBonds ETF with a similar maturity. Or conversely, if an advisor wanted to add duration and yield, they could evaluate the 2030 to 2034 investment grade corporate iBonds.

Asset-liability matching. This is a way for advisors to help clients save for a potential future expense. iBonds ETFs offer a defined maturity date to help clients have cash on hand when they need or want it. For example, if a client wants to save for a down payment on a second home, an advisor can invest that cash in iBonds ETFs with maturities to seek to match the time horizon between now and when the client expects to purchase the property.

Retirement planning. In the U.S. over 10,000 baby boomers reach retirement age every day, with the entire generation reaching retirement age by 2030.⁵ Advisors can help clients take proactive steps to help manage both the accumulation (when clients are working and saving) and decumulation (spending) phases. iBonds ETFs can be used to invest savings during the accumulation phase or to pursue a known spending target in the decumulation phase. iBonds ETFs can also be helpful in scaling Required Minimum Distributions (RMDs) or in creating a bridge for clients who want to delay applying for Social Security benefits, as detailed below. 

Required minimum distributions (RMDs). Clients must take a withdrawal from their retirement account when the account holder turns 72 (73 if they reach age 72 after 12/31/2022). The Internal Revenue Service (IRS) requires a minimum amount to be withdrawn each year thereafter, known as the RMD. From ages 72 to 82, clients will need to withdraw almost 45% of the account value.⁶

As shown as a hypothetical example in the table below, a single retiree turning 72-years old in 2024 has $100,000 invested in an IRA. This client must withdraw RMDs according to the IRS Uniform Lifetime Tables, by dividing the account size by the distribution period for each year. iBonds ETFs can potentially be used to ladder out the first 10 years of RMDs and any remaining assets in the account can be invested in other assets. Since iBonds ETFs mature in mid-October or December, clients will have cash in their accounts to help meet these IRS-mandated withdrawals before year-end.

Social Security bridge solution. Social Security payments can increase as retirees wait to collect their benefits. For most U.S. citizens, full retirement age is between 65 to 67 years old. Social Security benefits increase by 8% per year if the retiree waits until age 70 to begin collecting the funds.⁷ The net present value of waiting to collect can be calculated using the Social Security Benefits Estimator.

However, most investors retire sooner with average retirement age of 61 years according to a 2022 Gallup survey.⁸ Stopping work at age 61 could result in a 4- to 9-year gap before collecting the maximum Social Security benefits. iBonds ETFs can be used as a decumulation strategy to help fill the gap – known as a Social Security bridge. When the iBonds ETF matures, the proceeds can be used for the following year.

Advisors can use iBonds ETFs to manage a wide range of client needs, including cashflow management, asset-liability matching and retirement planning. iBonds ETFs enable advisors to build bond ladder strategies without the time-consuming and potentially costly effort to research and purchase the individual bonds. And iBonds ETFs can make it easy to scale bonds across multiple client accounts.