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.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
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.
Related Content
To continue reading this article
please register for free
This is different from signing in to your print subscription
Why am I seeing this? Find out more here
FAQs
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.
Should I buy tips in 2024? ›
April 2024, in fact, is also an opportune time for making new TIPS investments. But as this chart shows, real yields could go higher. Or, as happened in the months after October 2023, they could move sharply lower.
What is the difference between tips bonds and tips ETF? ›
Income Reinvestment
TIPS ETFs distributions consist of accrued coupon income and the principal inflation adjustment. Unlike individual TIPS bonds, TIPS ETFs distribute any upward adjustment in principal due to inflation as interest income in the year it occurs.
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.
Is it better to buy bonds or bond ETFs? ›
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.
What are the benefits of a bond ladder ETF? ›
Bond ladders can also enhance diversification and flexibility. Bond ladders may contain ETFs with various maturity dates, which boosts portfolio diversification. They also provide flexibility because proceeds at maturity can be reinvested or used to cover an expense.
Are tips good 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.
What is the real yield of tips for 5 years? ›
| Bonds | Yield | Year |
|---|
| US 20Y | 4.73 | 0.744% |
| US 30Y | 4.65 | 0.816% |
| US 10Y TIPS | 2.15 | 0.712% |
| US 5Y TIPS | 2.18 | 0.556% |
11 more rowsTIPS 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.
What is the downside to tips bonds? ›
Cons of Investing in TIPS:
TIPS typically pay lower interest rates than other securities, so they aren't the best choice for an investor with a fixed income. TIPS also comes with an interest rate risk. During deflation, the investor will either lose the interest earned or not earn anything.
As the name implies, TIPS are set up to protect you against inflation. Unlike other Treasury securities, where the principal is fixed, the principal of a TIPS can go up or down over its term.
Are tips better than Ibonds? ›
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.
What happens to tips when interest rates fall? ›
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 not performing well? ›
And just like conventional Treasury bonds, TIPS are impacted by movements in the interest rate marketplace. If Treasury yields increase because of rising inflation, TIPS are hedged. But if yields increase because of rising real yields, as we have right now, TIPS are susceptible to losses.
Are tips a good investment during 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 difference between ETF and bond ladder? ›
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.
How much money do you need to build a bond ladder? ›
While it isn't a rule, investment experts only recommend making a bond ladder if you have at least $100,000 to invest. Otherwise the ladder will be too short, or the rungs will be too far spread out. If you are only investing in corporate bonds, you may want to purchase even more.
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 do I build a bond ladder? ›
How Do You Build a Bond Ladder With ETFs? Bond exchange traded funds (ETFs) give investors easy exposure to different types of bonds with defined maturity dates. Therefore, in order to build a bond ladder with ETFs, you simply have to purchase a few ETFs that match different points on the yield curve.
