By David Enna, Tipswatch.com
As I predicted might happen in a December article on this topic, Blackrock’s iShares division last week launched a unique ETF holding just one bond: CUSIP 91282CJY8, a 10-year TIPS that matures in January 2034.
The ticker is IBIK and the technical name is “iShares iBonds Oct 2034 Term TIPS ETF.” See the fact sheet here and download the prospectus here.
I’m not a fan of Blackrock using the term iBonds in the fund name, since this can easily cause confusion with U.S. Series I Savings Bonds, usually called I Bonds. But I am sure the Treasury won’t be filing a trademark lawsuit.
IBIK joins a collection of these defined-maturity, single-year TIPS funds, which begin maturing in October 2024 and now run through 2034 with the addition of IBIK.
As you can see, the iShares ETFs are extremely small funds, especially compared to giants like Schwab’s U.S. TIPS (SCHP) and Vanguard’s Short-Term TIPS (VTIP). The tiny daily volume numbers would seem to indicate that purchases of these funds would create a bid-ask spread. For IBIJ, for example, Blackrock sets the predicted premium/discount at 0.20%.
Later this year, IBIK will add a second 10-year TIPS, the new one set to be originated in a July 18 auction. And then in 2029 it will add two more, the two 5-year TIPS to be issued that year and maturing in 2034.
Analysis
Reminder: These funds are designed to be held to maturity and the asset value will rise and fall with market trends through maturity, just like any other bond fund.
Because the expense ratio is just 0.1%, I really have no problem with using these funds as an alternative to buying individual TIPS. You could quickly build out a ladder through 2034 in 15 to 30 minutes, assuming the small daily volume doesn’t create issues.
In addition, the limited span of maturities means these ETFs aren’t the total solution for building an inflation-protected ladder of investments to cover 20 to 30 years.
iShares says these ETFs are designed to mature like a bond, trade like a stock. It says: “Combine the defined maturity and regular income distribution characteristics of a bond with the transparency and tradability of a stock.”
As for investment objectives, iShares notes the ETFs could be used to achieve multiple objectives. “Use to seek inflation protection with U.S. TIPS, build a bond ladder, and manage interest rate risk.”
Is there a required minimum investment?
No. The minimum investment would be the cost of one share (around $24.78 for IBIK) plus any possible brokerage commission. There are no limits on redemptions. iShares notes there can be a bid/ask spread on purchases and sales. That seems especially likely for an ETF that trades at such a low volume. The iShares prospectus notes:
When the Fund’s size is small, the Fund may experience low trading
volume and wide bid/ask spreads. In addition, the Fund may face the risk of being delisted if the Fund does not meet certain conditions of the listing exchange.
Traders in individual TIPS face these same bid-ask issues and at times can have trouble buying or selling TIPS in small numbers. This new ETF resolves the small-lot issue, at least. You can buy as little as one share.
Income and inflation accrual distributions
One of the advantages of owning a TIPS to maturity is that inflation accruals continue to build over time, increasing the amount of principal and also increasing the semi-annual coupon payment as the principal increases. An individual TIPS gets the benefit of compounding, even though the coupon is distributed twice a year.
But one of the disadvantages of a TIPS is that if held in a taxable account, those inflation accruals are subject to “phantom” federal income taxes in the current year, even though they are not paid out. Plus, if your account is at TreasuryDirect, you will face the “dreaded 1099-OID,” the cryptic form reporting your taxable accruals.
The plus. These defined-maturity ETFs “fix” the OID issue because inflation accruals will be paid out in the current year, along with the coupon interest. (This is the same way traditional TIPS funds work). That distribution makes these iShares TIPS ETFs more attractive for holding in a taxable account, because it eliminates the phantom income problem.
I assume this also means your broker will provide a single 1099-DIV tax form covering both coupon payments and inflation accruals.
The minus. Distributing the inflation accruals in the current year means that at maturity you will be receiving only the original par value and final coupon payment, since all the inflation accruals would have been distributed.
So to get the full benefits of compounding and true inflation protection you would need to reinvest all inflation-accrual distributions back into these TIPS ETFs or another similar product. That could be a problem because of the very low volume. For example, Vanguard says this on reinvestments in general: “A security’s distributions will not be reinvested if the security has a low average daily trading volume.”
For example, financial author Allan Roth ran into a low-volume problem while building his ladder of these defined maturity ETFs:
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 suppose my best test-case solution would be to buy one of these funds in a Vanguard account and see if dividends will get reinvested. If anyone has experience with these, post your findings in the comments section.
Final thoughts
Will I be investing in this new ETF, IBIK? No, because I have already purchased CUSIP 91282CJY8 as part of my TIPS ladder, filling the 2034 rung. But I can see the appeal for investors looking for a simpler way to invest in TIPS, especially in a taxable account.
The expense ratio of 0.1% is very good, especially if you can make your trades commission-free. But I do warn against using these ETFs in an assets-under-management account, which could wipe out 1% to 2% of your annual earnings.
One other issue is the fact that these funds don’t offer true inflation protection over the long term, since they pay out the inflation accruals in the current year. That is great for people seeking cash flow. But an investor seeking inflation protection would need to figure out a way to reinvest distributions.
• Now is an ideal time to build a TIPS ladder
• Confused by TIPS? Read my Q&A on TIPS
• TIPS in depth: Understand the language
• TIPS on the secondary market: Things to consider
• Upcoming schedule of TIPS auctions
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Feel free to post comments or questions below. If it is your first-ever comment, it will have to wait for moderation. After that, your comments will automatically appear.Please stay on topic and avoid political tirades.
David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing
Treasury Inflation-Protected Securities 
Trying to understand how iShares® iBonds® work.
If I buy one share of IBIJ for $25.50 (real yield of 2%) and inflation is 3% each year for the life of IBIJ what would I receive in Oct 2033? Thanks
Most likely you would receive a number around $25.50 (or possibly more), because the coupon interest and inflation accruals would be paid out along the way. You would have earned a return of coupon rate + inflation accruals. This ETF currently has only two holdings and both of them have below-market coupon yields, so the ETF is priced at a discount. It will get get two more holdings in 2028 when two 5-year TIPS are issued. In other words: I can’t answer your question.
Quick question on building bond ladders. When the discussion mentions “filling in rungs,” what sort of rungs are we talking about? Monthly each year, or annually? What is the preferred way to build a ladder? Have bonds maturing every month, or just one or two a year? I’m fairly new to bond investing. Thanks!
For most people, the goal is to fill out a ladder year by year. There could be more than one TIPS per year and the months of maturity could vary.
With MMFs in the 5+% range, why would I want to buy these images if I am on the low tax bracket?
They aren’t for everyone, definitely. If your goals are short term and long-term inflation protection isn’t a concern, then getting current short-term rates of 5%+ could be the way to go.
Thanks for this post, David, but I’m confused. Your table says the real yield of IBIG (love that ticker) is 2.21%. It looks like this one has paid out $0.37429 per share so far, which you need to double because that’s only for six months, right? With a current price of $25.46/share, that’s 2.94%. But 2.21% or 2.94%, I don’t understand how that’s the real yield if the price doesn’t increase with inflation. Or maybe I misunderstand what you mean by the etf will only pay out par value, plus the final coupon payment, when it closes.
I thought TIPS were confusing, but these are more so.
Also, what happens with these in times of deflation?
I agree with you about calling them iBonds, which apparently iShares registered as a trademark.
The real yield reflects the market real yield of the underlying TIPS at a moment in time. It would change when the market changes, just like it does for individual TIPS. If you buy IBIG today and get a real yield of 2.21%, that means your investment will earn 2.21% over inflation until this ETF matures in October 2030. I looked this morning and there are two TIPS maturing in 2030 (both held by this ETF) and their real yields are currently (as of May 30) 2.151% and 2.079%.
Your deflation question is answered in the prospectus. See link above.
My solution to the TIPS reinvestment problem is to buy TIPS on the secondary market that carry the lowest fixed interest rate available, meaning that there is almost nothing to reinvest. These TIPS should be the cheapest for any given maturity, because they have been heavily discounted to reflect their low fixed rate. Most of the returns at maturity will come from the compounding effect of inflation plus recapture of the discounted purchase at maturity…and the return at maturity should reflect a high percentage of the yield to maturity shown at initial purchase.
This seems like a reasonable strategy, when you can find a TIPS with a very low coupon rate. For example, the Feb 2052 TIPS has a coupon rate of just 0.125%, versus a market yield of 2.3%. So it sells at a massive discount with a price of about 56.75. I personally don’t mind a high coupon rate and dealing with the reinvestment risk, since the coupon rate could help fund re-fills to my TIPS ladder along the way.
I bought some of these Blackrock ETFs in my Fidelity IRA last year when I was first getting into TIPs. I set them up to reinvest the quarterly distributions, and they were reinvested successfully for both sets of distributions I have received so far. I am buying new 10-year TIPs at auction each year now, so I will probably not buy any more of these ETFs. But they did provide a simple way to build out the first ten years of a ladder when starting from scratch.
Great to know the reinvestment is working (readers have confirmed this for Fidelity and Schwab).
I added some IBIK yesterday to the inflation-protected portion of my fixed income allocation in my portfolio. (Small allocation – 1% of portfolio.) I plan to hold to maturity.
However, it seems to me there is a difference between buying a 10-year TIPS with a 2%+ real yield in May 2024 vs buying this TIPS ETF that will add 10-year TIPS with TBD real yields in July 2024 and two 5-year TIPS in 2029 with TBD real yields. With the individual TIPS, I can make a decision about whether to purchase or not. With the ETF, I’m going to get whatever I get.
I still am not clear as to what to do with the twice a year coupon payments from a TIPS ladder? What do TIPS investors do with the coupon payments for true inflation protection as you wrote?
I depends on the purpose of the TIPS ladder. Most likely the investor wants to put that money back to work by buying TIPS or other investments. Or, maybe the investor is looking to set aside cash to pay RMDs. At this time in the market, cash is paying a good return so I don’t mind accumulating a bit of cash in my TIPS ladder account (where I hope to buy issues from 2035 to 2039 in coming years.)
How will the ETF fund the costs of the distributions of OID, given that the Treasury will not pay the OID until maturity?
I am assuming some shares are sold to fund the distribution.
“But an investor seeking inflation protection would need to figure out a way to reinvest distributions.” Wouldn’t signing up for automatic dividend reinvestment solve this problem?
Yes, it would. But in some cases the trading volume may be too small for the brokerage to allow it. (Vanguard has denied this with other lightly traded funds.) I got feedback earlier that Schwab will reinvest the dividends, probably with some small price spread.
Yes, but then you are constantly running the dividend reinvestment through the trading cost, bid/ask, and premium/discount expense meter over and over again. This is in addition to the 0.1% headline expense.
It’s a potentially nice product for someone who wants current, not future, inflation protection and is going to spend those dividends. Just make sure you read the prospectus (especially Small Fund Risk) so you know what you’re getting into.