Assessing iShares iBonds Ladder ETFs: Roth

iShares will be debuting four new bond ladder ETFs, a one-click perpetual bond ladder. 

I was thrilled that this might be a further step to my industry challenge to create a low-cost self-liquidating TIPS ETF that would produce an inflation-adjusted cash flow. BlackRock took a great step when they introduced 10 defined maturity TIPS ETFs and LifeX created longer-term self-liquidating ETFs to create a cash flow, though costs were higher than I’d like. 

I spoke with Karen Veraa-Perry, head of U.S. iShares Fixed Income Strategy, about these funds. She confirmed that these are each a fund of funds. The one- to five-year TIPS ladder ETF (LDRI) would have 20% in each of the following funds:

2025 – IBIB 
2026 – IBIC 
2027 - IBID 
2028 – IBIE 
2029 – IBIF

Veraa-Perry told me the new TIPS ladder ETF would have a zero expense ratio so the total fees would be 0.10%, which is the expense ratio of the underlying five funds. Unfortunately, these are not self-liquidating. These new funds will be rolling bond ladders. At the end of June, each year, the shortest maturity underlying bond fund will be dropped and the next year added. In the case of this one to five-year TIPS ladder, in June of next year, the 2025-IBIB will be dropped and the 2030–IBIG fund will be added. 

My Analysis

I think these new ETFs are a way to perpetually manage a five-year bond ladder in different asset classes. I’ve constantly written about the fallacy of believing one doesn't reduce interest rate risk by holding a bond (or defined maturity bond ETF) until maturity eliminates interest rate risk, but at least there is the emotional benefit of staying the course. These new one-click bond ladder ETFs won’t provide that emotional comfort.

Remember that a bond fund is a ladder of bonds which perpetually buys new bonds when the short-term bonds either mature or are sold. For example, the iShares 0-5 Year TIPS Bond ETF (STIP) has a 2.27-year duration with a rock bottom 0.03% expense ratio. While the weightings of the holdings might be slightly different than the new TIPS ladder ETF, the overall performance of the two funds should be very similar. Veraa-Perry responded “that’s fair.” In fact, I’d pick STIP since the new fund has a much higher expense ratio.

My Conclusion

These new bond funds of funds are relatively low cost and are simple ways to manage a portfolio of bonds. But an even simpler and lower cost way is to buy a bond fund with similar holdings and durations.