With the Federal Reserve expected to continue raising rates, muni investors can consider a bond ladder strategy to diminish rate risk through target-date exchange traded funds.
BlackRock’s iShares recently expanded on its municipal bonds iBond line after rolling out the iShares iBonds Dec 2023 Term Muni Bond ETF (BATS: IBML). IBML has a 0.18% expense ratio.
IBML joins the other muni iBonds, including:
- iShares iBonds Sep 2017 Term Muni Bond ETF (NYSEArca: IBMF)
- iShares iBonds Sep 2018 Term Muni Bond ETF (NYSEArca: IBMG)
- iShares iBonds Sep 2019 Term Muni Bond ETF (NYSEArca: IBMH)
- iShares iBonds Sep 2020 Term Muni Bond ETF (NYSEArca: IBMI)
- iShares iBonds Dec 2021 Term Muni Bond ETF (NYSEArca: IBMJ)
- iShares iBonds Dec 2022 Term Muni Bond ETF (NYSEArca: IBMK)
These defined-maturity bond funds typically buy bonds that mature in the year the ETF will terminate, ensuring that investors can collect the bonds’ face value at maturity, along with a steady income stream along the way. Consequently, investors are meant to buy-and-hold these securities until maturity.
Like the new ETF’s name suggests, IBML will provide exposure to investment-grade municipal bonds that mature before December 2, 2023 to help investors gain exposure to tax-exempt income, expand on a bond ladder and manage interest rate risk.
“iBonds ETFs are designed to provide a yield-to-maturity profile comparable to that of the underlying bond portfolio and seek to preserve an investor’s anticipated yield-to-maturity through a combination of monthly distributions and a final end-date distribution,” according to iShares.
In contrast, a regular bond ETF runs the risk of losing its original principal if interest rates go up, depending on the bond ETF’s effective duration, since the typical bond funds would buy and sell debt securities to maintain their target short-, intermediate- or long-duration strategy.
While financial advisors and investors have implemented this strategy through individual debt securities, crafting bond ladders with individual bonds can be time consuming and cost prohibitive. Alternatively, investors can utilize target-date bond ETFs to easily create a bond ladder strategy.
By using target-date bond funds, a fixed-income investor could create a bond ladder strategy in a portfolio with varying maturity dates. The bonds’ maturity dates are evenly spaced across several years so that the proceeds from maturing bonds may be reinvested at regular intervals.
“iBonds ETFs are investment grade bond portfolios that investors can use to build diversified, laddered bond portfolios more easily than they can with individual bonds,” according to iShares.
For more information on new fund products, visit our new ETFs category.