iShares iBonds defined maturity etfs

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jjgaucho
Posts: 64
Joined: Mon Nov 05, 2018 5:04 pm

iShares iBonds defined maturity etfs

Post by jjgaucho »

Can someone please explain to me how the iShares iBonds defined maturity etfs differ from buying a bond fund of similar duration? Let's say i were to buy 10 years of treasuries in equal amounts, maturing each december from 2025 through 2034. iShares says the estimated net acquisition yield is 3.93%, 30 day SEC yield 3.75%, with an effective duration of 4.5 years. In comparison, VGIT shows a 30 day SEC yield of 3.65%, with duration of 5 years.

Are iShares as close as one can come to letting a brokerage construct a bond ladder where I am not subject to major NAV swings, and I'm essentially locking in a rate? Would these be less risky and volatile when compared to a bond fund? And yes, I know I can purchase my own TBills, but i honestly prefer to hold an ETF/Fund and can sell shares as I please, regardless of the miniscule expense ratio.

Thank you!
Eventually
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Joined: Mon Apr 24, 2023 11:27 am

Re: iShares iBonds defined maturity etfs

Post by Eventually »

Can someone please explain to me how the iShares iBonds defined maturity etfs differ from buying a bond fund of similar duration?
A fixed-duration bond fund will constantly add/remove bonds to maintain its duration whereas these funds will reduce their duration as they approach the end date. That gradual risk-off glidepath can be desirable for planning (e.g. you know when you're going to retire, or buy a house or something, at some future date and want to minimize volatility near that date but get more compensated risk while it is still distant).
Are iShares as close as one can come to letting a brokerage construct a bond ladder where I am not subject to major NAV swings, and I'm essentially locking in a rate?
Insofar as you're "locking in a rate", you'll see NAV swings when rates change. That's just math.
Would these be less risky and volatile when compared to a bond fund?
At any given point in time, these would be almost exactly as risky as a traditional bond fund of similar duration. But the duration will decrease over time, which should reduce volatility over time.
And yes, I know I can purchase my own TBills, but i honestly prefer to hold an ETF/Fund and can sell shares as I please, regardless of the miniscule expense ratio.
You can also sell TBills whenever the market is open so I'm not sure why this is a reason to prefer ETFs.

The main advantage of these IMO is that you can get diversified exposure to credit risk (corporates), or diversified municipal income, which is impractical to do for most individuals.
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sycamore
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Re: iShares iBonds defined maturity etfs

Post by sycamore »

jjgaucho wrote: Fri Oct 11, 2024 12:45 pm ... Are iShares as close as one can come to letting a brokerage construct a bond ladder where I am not subject to major NAV swings, and I'm essentially locking in a rate?
First, "locking in a rate" assumes:
  • you can and will hold to maturity and don't have to sell early
  • the fund can invest bond proceeds into cash/money market that yields a similar amount (as the rate when you purchased) until the ETF liquidates (in January 2029, some bonds in the 2029 fund will mature -- the fund will invest those proceeds at 2029 rates in cash, until the 2029 liquidates later in the year).
  • the individual bonds held by the fund don't default
Back to your question. They're one way. Another way is to pay a brokerage for a Separately Managed Account where they build a bond ladder to your specifications. But you probably don't want to pay for an SMA.
jjgaucho wrote: Fri Oct 11, 2024 12:45 pm Would these be less risky and volatile when compared to a bond fund? ...
You're making an apples versus oranges comparison here. One kind has a fixed duration over time, the one kind has a decreasing duration.

And the comparison is not a one-time thing. If you're comparing a maturity 2029 fund with a bond fund with average 5 year maturity right now (in October 2024), you'd describe the volatility comparison in one way (roughly the same), but in 4 years from now the comparison would be different (the maturity 2029 fund would be have less volatile NAV).

In general I think it's best to remember that bond funds of all stripes contain pros and cons and are subject to multiple risks. Saying that one is less risky is too vague IMO. Which risks are you concerned about?

I think it's best to consider the basics before the NAV swings. What do you want bonds for? Do you have a defined goal in mind with a defined time frame?
brightlightstonight
Posts: 256
Joined: Mon May 20, 2024 7:40 pm
Location: California

Re: iShares iBonds defined maturity etfs

Post by brightlightstonight »

Hilariously, iShares has announced that they're bundling these defined maturity ETFs into rolling ladder ETFs.

https://www.thinkadvisor.com/2024/10/29 ... bond-etfs/
"The iShares iBonds Ladder ETFs will be a seamless extension to the iBonds franchise, seeking to provide a turnkey solution to bond laddering while making investing easier and more affordable"
Congrats, iShares, on re-inventing the bond fund!
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