iShares iBonds ETFs: What Are They? How Do They Work?

iBonds ETFs offer a unique approach to bond laddering. Here’s what to know about them.

kent
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Research Lead
Reviewed by: Lisa Barr
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Edited by: Lisa Barr

iShares iBonds ETFs are designed to mimic the characteristics of individual bonds, including single defined maturity dates like individual bonds, but in an ETF wrapper. Learn how these unique bond ETFs work, as well as the pros and cons of investing in them. 

What Are iShares iBonds ETFs? 

iShares iBonds ETFs are a series of exchange-traded funds offered by BlackRock, Inc., one of the largest asset management companies in the world. These ETFs are designed to provide exposure to a diversified portfolio of fixed income securities, specifically focusing on U.S. Treasury bonds and U.S. corporate bonds. 

The iShares iBonds ETFs may be attractive to investors seeking a predictable income stream with a defined maturity date, akin to individual bonds, while still enjoying the benefits of an ETF structure, such as liquidity and ease of trading on exchanges. Investors may also use iBonds ETFs to create scalable bond ladders with only a few ETFs, rather than trading numerous bonds. 

What Is Bond Laddering? 

Bond laddering is an investment strategy used by investors, particularly in fixed income portfolios, to manage interest rate risk, achieve consistent income and maintain liquidity. It involves dividing a fixed income portfolio into multiple bonds with staggered maturities, creating a "ladder" of bonds. 

The concept of bond laddering is similar to rungs on a ladder, where each rung represents an individual bond with a different maturity date. The bonds in the ladder are selected to mature at different intervals, such as annually or semiannually, over a specific time horizon. 

How Do iBonds ETFs Work? 

The iBonds ETFs are unique in that they are designed to behave like individual bonds with defined maturity dates. Each iShares iBonds ETF holds a portfolio of several bonds that are aligned to a specific year, known as the "target maturity year." The target maturity year is typically displayed in the ETF's name, indicating the year in which the fund is expected to liquidate, distributing the proceeds to shareholders. 

For example, if you have an iShares iBonds ETF with a target maturity of 2025, such as the iShares iBonds Dec 2025 Term Treasury ETF (IBTF), the fund will primarily hold bonds maturing in the year 2025. Once the ETF reaches its target maturity year, it distributes the net asset value to shareholders, and the fund is dissolved. 

What Are the Pros and Cons of Investing in iBonds ETFs? 

Investing in iShares iBonds ETFs can offer certain advantages and disadvantages. Let's explore some of the key pros and cons of investing in these funds: 

Pros 

  • Diversification: Each iShares iBonds ETF holds a portfolio of multiple bonds, which helps to spread risk across different debt instruments. This diversification can reduce the impact of defaults on individual bonds. 
  • Liquidity: Unlike individual bonds, iShares iBonds ETFs trade on stock exchanges throughout the day, providing investors with liquidity and flexibility to buy or sell shares at market prices. 
  • Lower minimum investment: Investing in iShares iBonds ETFs allows individuals to access a diversified bond portfolio with a lower minimum investment compared to purchasing individual bonds, which may require larger sums of money. 
  • Build bond ladders: Investors can build bond ladders with only a few ETFs, rather than trading numerous bonds. 
  • Pick points on the yield curve: iBonds ETFs offer diversified exposure to bonds that mature in the calendar year of the fund's name, allowing investors to target specific points on the yield curve. 

Cons 

  • Interest rate risk: Although iShares iBonds ETFs aim to reduce interest rate risk by holding bonds that mature around the target date, they are still subject to the fluctuations of interest rates. If interest rates rise significantly, the value of the ETF may decline. 
  • Credit risk: As with any bond investment, iShares iBonds ETFs are exposed to credit risk, especially those exposed to high yield corporate bonds. If one or more of the underlying bond issuers experience financial difficulties or default, it can impact the overall performance of the ETF.  
  • Limited growth potential: Unlike stocks, bond investments typically offer lower growth potential. iShares iBonds ETFs are primarily designed for income and capital preservation, so they may not provide significant capital appreciation opportunities. 
  • Changing market conditions: Market conditions can affect the performance of bond investments, and iShares iBonds ETFs are not immune to economic shifts, changes in interest rates or other macroeconomic factors. 

Bottom Line on iBond ETFs 

iShares iBonds ETFs are innovative exchange-traded products that enable investors to hold a basket of bonds that share the same maturity date. This allows investors to use ETFs for similar purposes as they would with individual bonds, including a laddering strategy, however investors can hold a few funds rather than multiple bonds. As with any investment decision, it's essential to consider your financial goals, risk tolerance and time horizon before investing in iShares iBonds ETFs or any other financial product.  

Kent Thune is Research Lead for etf.com, focusing on educational content, thought leadership, content management and search engine optimization. Before joining etf.com, he wrote for numerous investment websites, including Seeking Alpha and Kiplinger. 

 

Kent holds a Master of Business Administration (MBA) degree and is a practicing Certified Financial Planner (CFP®) with 25 years of experience managing investments, guiding clients through some of the worst economic and market environments in U.S. history. He has also served as an adjunct professor, teaching classes for The College of Charleston and Trident Technical College on the topics of retirement planning, business finance, and entrepreneurship. 

 

Kent founded a registered investment advisory firm in 2006 and is based in Hilton Head Island, SC, where he lives with his wife and two sons. Outside of work, Kent enjoys spending time with his family, playing guitar, and working on his philosophy book, which he plans to publish in the coming year.