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 date or year that the bonds will maturity is typically in the name of the fund. You could choose to build your ladder with multiple target-maturity ETFs representing different segments of the bond market, with different target years.
What is the tips bond ladder? ›
In practice, building a TIPS ladder means taking a chunk of money from your savings (e.g., cash, brokerage, retirement accounts) and buying a number of individual bonds that pay semi-annual interest and separately mature over a specific period of time.
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.
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.
Are tips ETFs a good investment? ›
By investing in these ETFs, you gain exposure to the TIPS market in one security from an ETF that trades on the major stock exchanges. As inflation rises, the value of TIPS bonds increases, as does the net asset value (NAV) of the ETF. TIPS ETFs can be a good fixed-income option for investors to hedge inflation risk.
What is the bond ladder strategy? ›
A bond ladder is a strategic investment approach that involves purchasing a variety of bonds with differing maturity dates. Think of it as a staircase of investments, where each step represents a bond that matures at a different time.
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? ›
Since a bond ETF holds many such bonds, its value can decrease as well. The duration of the ETF's portfolio will tell you how sensitive it is to interest rate changes. Additionally, if the creditworthiness of the bonds within the ETF deteriorates, this can also lead to a decrease in the ETF's value.
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.
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.
How long do tips bonds last? ›
We sell TIPS for a term of 5, 10, or 30 years.
Are tips a good investment for retirees? ›
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. Surprisingly, this approach can also make investing in stocks less risky from a living standard perspective.
What is the real yield of tips for 5 years? ›
Basic Info. 5 Year TIPS/Treasury Breakeven Rate is at 2.28%, compared to 2.25% the previous market day and 2.14% last year. This is higher than the long term average of 1.93%.
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.
How do you make a bond ladder with ETFs? ›
To set up a 5-year bond ladder with $1,000 to invest, for example, you would buy five bonds for $200 each that mature in 2024 to 2029. Once the 2024 bonds mature, you can stay invested by buying a 2030 bond with the proceeds.
Is a CD ladder better than a bond ladder? ›
If you prefer to hold more in cash, a CD ladder could be used to potentially increase yield. A CD ladder works the same way as a bond ladder except the maturities are usually shorter (3 months – 3 years). These strategies could be used together as well.
What is the best bond ETF for 2024? ›
- The 10 Best Bond ETFs of June 2024.
- Pimco Active Bond Exchange-Traded Fund (BOND)
- Vanguard Intermediate-Term Treasury Index Fund ETF (VGIT)
- Pimco Enhanced Short Maturity Active ESG ETF (EMNT)
- ProShares Investment Grade-Interest Rate Hedged ETF (IGHG)
- iShares National Muni Bond ETF (MUB)
TIPS are a type of Treasury security whose principal value is indexed to inflation. When inflation rises, the TIPS' principal value is adjusted up. If there's deflation, then the principal value is adjusted lower.
Why are tips a good investment now? ›
TIPS are low-risk investments that act as an inflation hedge, making them a good choice for risk-averse investors looking for income protected against inflation.
TIPS are available with five-, 10- and 30-year maturities. They can be purchased in increments of $100. You can buy individual TIPS directly from the U.S. government at TreasuryDirect.gov or through a brokerage firm. Or you can buy a basket of TIPS by using a mutual fund or an exchange-traded fund.
What is the downside of bond ladders? ›
It cannot predict or project the return of any specific investments. While predictable, bond income is not guaranteed and is subject to call risk as well as possible default on principal and interest (which increases with lower-rated securities).
How to build a bond ladder for retirement? ›
How Do You Build a 10-Year Treasury Bond Ladder? In order to easily build a 10-year Treasury bond ladder, simply purchase 10 bond ETFs; one for each year of maturity over the next decade.
How long should a bond ladder be? ›
Typically, ladder strategies set bond maturities at 6- or 12-month intervals over 5- or 10-year periods. Investors count on receiving interest payments from bonds across all maturity steps in the ladder. In addition, investors expect bonds to return capital at maturity.
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.
How to ladder bond with Vanguard? ›
Ladder. A tool in the management of a bond portfolio that can be used to increase rewards or reduce risks by purchasing a number of bonds and structuring their maturities over time so that they mature at different dates. For example, buying 5-, 10-, 15-, and 20-year maturity bonds of equal value would be a bond ladder.
Can you build wealth with ETFs? ›
Vanguard S&P 500 ETF
Billionaires don't just buy individual stocks. ETFs can have excellent wealth-building potential over time, as well. Billionaire investors like Warren Buffett and others are often known for their stock-picking abilities, and for good reason.
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.
