New IBond defined maturity bond ladder etfs

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OneRadDude
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New IBond defined maturity bond ladder etfs

Post by OneRadDude »

I’m interested in adding TIPS as a low risk inflation hedge, prefer holding individual bonds to maturity instead of taking interest rate risk in a fund/etf. The simplicity of defined maturity etfs to build a ladder seems appealing, so I’ve been researching those from Blackrock. Just yesterday they announced a set of new products combining the single year maturities (rungs) into 5 year ladders within a single etf, LDRI (for TIPS). Thoughts?
UpperNwGuy
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Re: New IBond defined maturity bond ladder etfs

Post by UpperNwGuy »

Sounds like a great idea! Anything is preferable to the hassle of owning individual bonds, so this might be a helpful alternative.
JayB
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Re: New IBond defined maturity bond ladder etfs

Post by JayB »

OneRadDude wrote: Wed Oct 30, 2024 5:57 pm I’m interested in adding TIPS as a low risk inflation hedge, prefer holding individual bonds to maturity instead of taking interest rate risk in a fund/etf. The simplicity of defined maturity etfs to build a ladder seems appealing, so I’ve been researching those from Blackrock. Just yesterday they announced a set of new products combining the single year maturities (rungs) into 5 year ladders within a single etf, LDRI (for TIPS). Thoughts?
These seem to be rolling ladders rather than typical income ladders where maturing rungs are meant to be spent. So I'm not sure how much value they add as compared to a typical short-term TIPS fund. As noted by Blackrock,
Each index will be reconstituted and rebalanced annually by replacing the iShares iBonds ETF that terminates in the current year with one that terminates five years forward and assigning equal weights to each constituent.
brightlightstonight
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Re: New IBond defined maturity bond ladder etfs

Post by brightlightstonight »

OneRadDude wrote: Wed Oct 30, 2024 5:57 pm I’m interested in adding TIPS as a low risk inflation hedge, prefer holding individual bonds to maturity instead of taking interest rate risk in a fund/etf. The simplicity of defined maturity etfs to build a ladder seems appealing, so I’ve been researching those from Blackrock. Just yesterday they announced a set of new products combining the single year maturities (rungs) into 5 year ladders within a single etf, LDRI (for TIPS). Thoughts?
I can't see how this is different from a short-term TIPS bond fund like VTIP - other than the slightly higher ER. They're both rolling ladders of equivalent duration.
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sycamore
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Re: New IBond defined maturity bond ladder etfs

Post by sycamore »

If your goal is a "rolling" set of TIPS, and the duration is short-ish like 2 - 3 years, I'd go with VTIP or STIP.

Lower expense ratio with VTIP or STIP.

And one downside of the new iShares rolling ladder ETF is related to the underlying ETF. E.g., the 2025 TIPS ETF holds the TIPS issues that mature in 2025. When the April issue matures, the fund gets the proceeds and what does the fund do with it? Not 100% sure but I think the proceeds are invested in money market-like assets that are not inflation-indexed.

Granted, the amount that's not inflation-indexed may be relatively small but if you'd rather have all your ladder assets inflation-indexes then VTIP or STIP is a better choice.
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OneRadDude
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Re: New IBond defined maturity bond ladder etfs

Post by OneRadDude »

Thanks for the thoughtful replies. I did wonder if these would be much different from a short term TIPS etf like VTIP, and whether there would be material performance differences over the medium-long term in the setting of rising interest rates. Could it matter that in a rising interest rate environment having each yearly rung held to maturity might outperform VTIP, or would the rolling nature of LDRI result in a similar outcome?
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sycamore
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Re: New IBond defined maturity bond ladder etfs

Post by sycamore »

OneRadDude wrote: Thu Oct 31, 2024 5:17 pm Thanks for the thoughtful replies. I did wonder if these would be much different from a short term TIPS etf like VTIP, and whether there would be material performance differences over the medium-long term in the setting of rising interest rates. Could it matter that in a rising interest rate environment having each yearly rung held to maturity might outperform VTIP, or would the rolling nature of LDRI result in a similar outcome?
The performance would be nearly the same if we assume the holdings of LDRI are nearly the same as VTIP or STIP.

But that's probably not a good assumption. By design the rolling ladder ETFs hold 20% in each of the 5 target year ETFs. So 20% in 2025 TIPS, 20% in 2026 TIPS, etc.

Does that match the distribution of TIPS issuances in the years 2025-2029? I have no idea.

It seems unlikely the US Treasury issues or reissues TIPS in roughly the same amount year after year. It might be more like this made-up example: 16% in 2025 TIPS, 21% in 2026, 22% in 2027, 17% in 2028, 24% in 2029.

This discussion applies to the other iShares rolling ladder ETFs, where the issuances (or defaults) of new bonds on a per year basis is unlikely to match an exact 20% per year.

My hunch is there's little to be gained by guessing whether a 20% per rung will be a better way to divvy up a ladder versus following the market distribution of bond issuance over the same time period. Too much speculation of future rates and economic/political events is involved.

If one is interested in a short-ish rolling ladder at the very lowest cost, build one using CD, bonds, or TIPS.
If one wants the same kind of ladder but without building/maintaining one, and at the lowest cost, use VTIP or STIP.
If one wants the same kind of ladder that mimics how an "equal $ per rung" homemade ladder works, the LDRx ETFs are a good choice.
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OneRadDude
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Re: New IBond defined maturity bond ladder etfs

Post by OneRadDude »

Sycamore you’ve distilled it down to the heart of my question, can LDRI reasonably replicate the performance of a 5 year ladder of individual TIPS held to maturity, assuming ~ 20% in each yearly rung? My desire is for inflation protection without any risk to principal of rising rates (as seen in the ~ 10% price decline of VTIP in 2021-2022). I have no liability matching needs. But rather than having to create my own ladder does this offer similar inflation adjustment, most importantly without potential for principal loss, like holding individual TIPS to maturity? The ER of .10% compared to .04% of VTIP would be worth it to me. Thanks.
GAAP
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Re: New IBond defined maturity bond ladder etfs

Post by GAAP »

If you want a true ladder without buying individual TIPS, then perhaps the iBond ETFs will do what you want. Each fund has a specific targeted maturity. Their TIPS version goes out ten years. To build a 5-year ladder like you described, you would need to buy equal amounts of five different ETFs.

https://www.ishares.com/us/products/337 ... m-tips-etf
“Adapt what is useful, reject what is useless, and add what is specifically your own.” ― Bruce Lee
cvn74n2
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Re: New IBond defined maturity bond ladder etfs

Post by cvn74n2 »

As I posted in another thread, I did a test to see if IShares term-defined TIPS would work as an adequate substitute to building / owning individual TIPS.

I learned there was a cost in total return beyond the ER to them.

My test used IBIA (2024 defined maturity TIPS) to rolling my own starting on 01 April 2024. The total return for IBIA was 2.28% with dividends and inflation adjustments included versus 2.85% by buying the Jul and Oct 24 TIPS and rolling over the Jul proceeds to a TBill maturing 15 Oct.

While there is some convenience in the ETFs (especially in taxable accounts), they will likely underperform a hand-built ladder.
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sycamore
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Re: New IBond defined maturity bond ladder etfs

Post by sycamore »

OneRadDude wrote: Sat Nov 02, 2024 5:57 pm Sycamore you’ve distilled it down to the heart of my question, can LDRI reasonably replicate the performance of a 5 year ladder of individual TIPS held to maturity, assuming ~ 20% in each yearly rung? My desire is for inflation protection without any risk to principal of rising rates (as seen in the ~ 10% price decline of VTIP in 2021-2022). I have no liability matching needs. But rather than having to create my own ladder does this offer similar inflation adjustment, most importantly without potential for principal loss, like holding individual TIPS to maturity? The ER of .10% compared to .04% of VTIP would be worth it to me. Thanks.
For sure LDRI is not the same as a homegrown TIPS ladder.

Ideally one builds a rolling ladder with the intent of holding each rung to maturity. But if you do sell a rung before maturity you are exposed to a risk of principal loss. Whether that risk is actualized depends on rates have moved up since the time you bought the rung. It's also possible you could have a gain when selling before maturity.

Things are different with LDRI. You don't have a rung maturing every year. So if you need a rung's worth of money for expenses, you have to sell shares. Let's say you have to sell say $1000 of shares. You don't get to pick which part of LDRI's holdings you want to sell so $200 comes from 2025 TIPS, $200 from 2026, etc. So you'd essentially be selling before maturity on four of five rungs, and thus you'd be at risk of losing principal. There's no way to avoid that risk with a fund like LDRI (or BND or any other typical bond fund).

This does not mean LDRI would do a bad job for you. The cost of selling early may be relatively small and not worth worrying about. But that's an unknown - we don't know how far rates could rise, even for short-term rates (under 5 years).
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OneRadDude
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Re: New IBond defined maturity bond ladder etfs

Post by OneRadDude »

That’s a really great point that hadn’t occurred to me sycamore, appreciate your insights. If/when I sell from LDRI the proceeds would come equally from all 5 rungs, so there would be interest rate risk introduced since the rungs would not be held to maturity. Given the similarity in duration of LDRI and VTIP I’d imagine the potential principal loss in an increased rate environment would be similar between the two, so VTIP might be the better choice. Alternatively I might invest 20% of my TIPS allocation in each of the next five single year defined maturity etfs (IBIB, IBIC, IBID, etc) and if I need some funds wait until the shortest duration one matures such that my rate risk is negated.
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