How to use iBonds like a pro

Feb 27, 2020

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?

Learn more about laddering with ETFs.

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.


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