A Case for BlackRock’s New Defined-Maturity TIPS ETFs

On Sept. 21, iShares launched the industry’s first TIPS defined-maturity bond ETFs.

The TIPS iBonds ETF roster consists of 10 funds that invest in U.S. Treasury Inflation-Protected Securities with maturities ranging from 2024 to 2033. I just bought all 10, which will almost certainly get me a return of inflation, plus about 2.3% annually over the next decade.  

A couple of years ago, TIPS were yielding inflation less about 1.6% annually. As of the time of this writing, they are yielding inflation plus about 2.4%. Possible higher inflation or even hyper-inflation is a risk. That’s why I built a 30-year TIPS ladder earlier this year. 

I described how I built my guaranteed 4% real 30-year safe withdrawal rate here. But it took a lot of effort and larger amounts of investments, so I challenged the ETF industry to launch an exchange-traded fund that would simplify and allow smaller purchases.

John Rekenthaler at Morningstar wrote TIPS Ladder Funds Don’t Exist But They Should and David Enna at TIPSwatch asked Can We Build a Better TIPS Fund?

New BlackRock Funds

BlackRock launched the new line of TIPS ETFs, which, as I mentioned above, are the first TIPS defined-maturity bond ETFs. The ETFs will mature on Oct. 15 of the designated year purchased. So, for example, the iShares iBonds Oct 2029 Term TIPS ETF (IBIF) will yield about 2.36% annually plus inflation. That’s estimated at a 2.46% yield less the 0.10% annual expense ratio. Unlike traditional TIPS funds, these funds will automatically mature and be liquidated with a fairly certain return above inflation.  

I spoke with Karen Veraa, head of U.S. iShares Fixed Income Strategy at BlackRock, about these new ETFs. She confirmed that the purpose of the new ETFs is for the investor to buy and hold until maturity. She noted that buying the individual TIPS directly can be complex with large bid-ask spreads. She also said the tax reporting is simplified with annual 1099s issued. 

Finally, it solves the issue of phantom income tax because distributions include both the Consumer Product Index and coupon payments. Buying the TIPS outside of funds incurs taxes on the CPI component that is accrued but not paid out in cash. Bid-ask spreads seemed to average around 0.08%, and Veraa stated that these should come down over time as more trading occurs.  

Buying 10 BlackRock ETFs 

Before writing about these ETFs, I kicked the tires and bought all 10. I decided I wanted $1,000 in real inflation-adjusted dollars annually.

By letting dividends reinvest, I could get a good approximation by dividing $1,000 by the real yield to the number of years until maturity. For example, the 2029 maturity (IBIF) was yielding 2.36% so that meant I needed to buy $869.40 now ($1,000/1.0236^6).

The 1.0236 is one plus the yield and the sixth power is the rough number of years until maturity. Below are my calculations on what I would need to buy showing it would cost me about $8,784 today to buy an inflation adjusted $1,000 a year for the next decade.  

I thought it would be a piece of cake to buy these, but I was wrong—at least on two of them. Using the Fidelity retail website, all went through except two. For IBIC and IBIF, I got error notifications that the share quantity I entered was greater than the maximum allowed.

How could buying fewer than 25 shares for about $900 be too high? I followed up with Fidelity and eventually found out I was violating Market Access Rules. Fidelity explained that the quantity I was buying was too high relative to the average volume over the past 90 days. They were eventually able to solve it for me, but I couldn’t buy the exact dollar amount I wanted.  

I asked Veraa about my experience and received an email response from BlackRock media relations stating “We are declining to comment.”  

Conclusion 

I like these ETFs and asked John Rekenthaler at Morningstar to give me his views. He responded: 

I highly approve of these new funds. They not only meet a need, being the first target-date TIPS funds, but at 10 basis points per year in expenses, the price is right. Plus, the launch is very timely, as TIPS now sell at their lowest price in more than a decade. 

I suspect the trading glitch will be short-lived as these ETFs had only begun trading a few days earlier. I’m rooting for these new ETFs to succeed and hopefully lower the expense ratio and bid-ask spreads.

Though these new ETFs don’t solve a 30-year safe withdrawal rate, they could be perfect for uses such as bridging the gap while delaying Social Security by building an eight-year ladder at age 62 and waiting to age 70 to begin distributions.  

Could BlackRock ever launch simpler funds that go out beyond the 10-year period or funds that would self-liquidate over multiple years like I challenged the industry?

I posed this question to Veraa who responded, “We are always looking to make it easier for people to manage income in retirement.”