What does this mean for investors?
I just found out that Blackrock launched a new suite of iBonds ETFs on August 9th that are UCITS and domiciled in Ireland. This is exciting news because non-US investors now have access to this type of fixed maturity bond for the first time.
Blackrock's iBond ETFs have been available on the US market since 2010. However, due to the $60k cap on US domiciled assets exempt from estate tax, fixed maturity bond funds have not been available outside of the US market until now. iBonds ETFs should not be confused with the I Bonds issued by the US government have been popular among US investors for many years.
The difference between I Bonds and iBonds ETFs:
I Bonds (or Series I savings bonds) are non-marketable financial securities issued by the U.S. government that earn a fixed rate of interest that’s adjusted based on inflation. These bonds can protect savings from the negative effects of inflation and add stability to investment portfolios. They have been incredibly popular in the past two years due to the spike in inflation in the US. However, they are only available to US residents and citizens in limited quantities so they are not useful for non-US investors due to estate tax liability.
What are iBonds ETFs?
Unlike normal bond ETFs that are ongoing (there is no end date), the iBonds have a fixed ending date when the NAV (Net Asset Value) is returned to investors. This fixed ending feature lends itself very nicely to the popular bond laddering strategy.
Uses for fixed-maturity bond funds:
1. Laddering - iBonds ETFs make it easy to create scalable bond ladders, a popular strategy by many Bogleheads, especially for retirement planning.
2. Short Term Savings Goals – If you have a lump sum needed in the short to medium term, e.g. holiday, house downpayment or college tuition, these bond ETFs are the perfect tool to seek additional income that matures at dates aligned with your time frame and (near) zero risk of capital loss.
3. Match your risk profile – if you have a preference for a particular bond sector (eg Gov, corporate, high yield, etc) and/or seeking a particular point on the yield curve. For now, the Irish domiciled UCITS range is limited but I can envision the full US range being ported across as well if they prove to be popular.
UCITS iBonds in Detail:
The Blackrock iBonds exchange-traded funds (ETFs) are a collection of bond ETFs that hold a diversified portfolio of bonds with similar maturity dates. Each ETF provides regular interest payments, can be traded on exchanges, and distributes a final payout in its stated maturity year, similar to a traditional bond.
Name: UCITS iBonds
Fund manager: BlackRock Asset Management Ireland Limited
Launch date: August 9, 2023
Fund Type: ETF
Asset Class: Fixed income
Bond sector: Investment Corporate
Distribution Type: Distributing (quarterly) and Accumulating
Base Currency: USD & EUR
Available Currency: EUR, USD and MXN (hedged)
Ticker: Various (See table below)
Exchanges: LSE for USD ETFs, Borsa/Xetra/Euronext for EUR ETFs and Cboe Europe for MXN ETFs.
Product structure: Physical
Rebalancing frequency: Monthly
Maturity dates: December 2026 & 2028
Legal form: UCITS, UK reporting, ISA eligibility and SIPP approved
Comments and Analysis:
Blackrock launched the UCITS iBonds at a perfect time and these iBonds will most likely be a success.
The rising interest rates of the past two years along with higher yield on fixed income has caught a lot of attention from investors. The fixed maturity date feature is unique (outside of the US) so Blackrock will enjoy first mover advantage. I have not heard of anything that suggests rivals like Vanguard or State Street will be launching anything similar any time soon.
Why I really like these iBonds:
UCITS – this legal form is perfect for expats and non-US investors looking to avoid going above the low $60K USD US inheritance tax exemption
Price – At only 0.12% total expense ratio, this is rock bottom, even for a bond fund, so a great value for investors
Yield – Having the bonds invested in at corporate grade is the sweet spot for me for these bonds. For long term investing, I always advise people to select Gov bonds (avoid corporate grade and never junk/high yield) to ensure no default risk rather than chasing yield. Given the short time frame (3 and 5 years only) the investment grade corporate bonds will have a more attractive yield while default risk is still (near) zero.
Fixed end date – This is a great feature given that nearly everyone at some stage is looking to save for the short/intermediate term (e.g. downpayment on a property or university fees). Market volatility often precludes investing in equity for these goals.
What could be better:
Shorter Maturity Intervals – needs to be yearly for each series. This is really important for retirement planning purposes so people can match their yearly spending plans if they're laddering.
Time Range – needs to extend to 7 years, just like the US domiciled version. No need to go over 7 years as people are better off investing in equity at a time frame greater than 7 years.
Additional Currencies – I’m surprised there were no GBP versions with the initial launch. I suspect that will come shortly and perhaps an AUD version on the ASX would be great as well.
Missing Combinations – with only 7 ETFs with the initial launch, there are a lot of combinations missing given the number of currencies, distribution types and time frames. I’m sure Blackrock will add the missing ETFs subsequently should the initial launch be a success.
I was pleasantly surprised by this unexpected launch of the iBonds by Blackrock. Reading through the information, I can see the product was well thought out, well-structured and well-produced. The strengths and benefits of the products truly dwarf the small number of items that could be improved.
This is a product that investors have been asking for a long time and launch timing was perfect, given the rising interest rate of recent times. Success is likely for Blackrock. I do hope that Vanguard or State Street would consider a similar launch in the near future. Competition will only benefit the retail investors.
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