BlackRock Launches Unique ETF Focusing on TIPS
BlackRock’s iShares division has recently introduced a new ETF called the “iShares iBonds October 2036 Term TIPS ETF,” or IBIM for short. Currently, it holds just one bond—CUSIP 91282CPU9, which is a 10-year TIPS maturing in January 2036.
The ETF aims to track the performance of U.S. Treasury inflation-protected securities that mature in 2036, with plans to incorporate a second TIPS later this year, alongside two five-year TIPS in 2031. This marks the 11th ETF of its kind, and though I initially had reservations about such niche funds, I’ve observed a growing appeal over the years.
I can’t help but wonder, who exactly are these ETFs for? They typically hold just a handful of bonds, which might lead some to question the wisdom of buying TIPS individually instead. Perhaps the convenience of managing tax reporting in taxable accounts is a factor. Maybe they’re aimed at clients of financial advisors, which could inflate costs for individual investors.
The iShares selection ranges from maturities in 2026 to 2036, and these funds are really intended for long-term holding—investors would ideally hold the ETF until maturity and then cash out. You can find the prospectus and fact sheet for the new fund online.
iShares describes these ETFs as designed to “maturify like bonds and trade like stocks.” I see their usefulness, especially for those wanting to build a diversified TIPS ladder for 2036. They should closely mimic the performance of the underlying TIPS. A comparison with Vanguard’s short-term TIPS fund, VTIP, might also be worthwhile.
IBIM has an expense ratio of 0.10%, notably higher than VTIP’s 0.03%. Still, for a fund of this size, it’s fairly reasonable.
Analysis
These funds are structured for maturity, and like any bond funds, the asset values will fluctuate until they mature. Considering the low expense ratio, opting for these instead of individual TIPS isn’t a bad deal—creating a TIPS ladder for 2036 could take only 15 to 30 minutes.
That said, their short maturity window means they don’t provide a comprehensive solution for someone looking to create a robust inflation-protected investment strategy for the long haul. I discussed this with Jason Zweig previously, noting that while they can work as a sort of “bridge” to Social Security for those retiring soon, they might not adequately shield purchasing power over 30 years.
As I’ve stated before, if you plan to retire within 10 years, this fund may help, but it won’t guarantee your purchasing power for decades.
The trading size and activity of these ETFs have surged in recent years, but they remain relatively small compared to larger entities like VTIP. I suspect these funds attract many investors who work with advisors, given the complexity of TIPS and the straightforwardness of these ETFs.
Since ETFs operate like stocks, there aren’t any minimum investments required. The current share price for IBIM hovers around $25.13. However, larger trades might present some challenges regarding price discrepancies.
Income and Distribution of Inflation Accruals
One compelling aspect of owning TIPS to maturity is that as inflation rises, the principal value increases, subsequently raising semi-annual coupon payments. These payments occur twice a year and come with the advantage of compound interest.
However, a downside to holding TIPS in taxable accounts is the “phantom” income taxes that accrue over time, despite not being realized until maturity or sale. This can complicate matters if your account is managed through TreasuryDirect, where different tax forms come into play.
ETF Plus. These fixed-maturity ETFs address the OID issue by distributing inflation accruals along with coupon interest, thereby sidestepping the problem of ghost income. I believe this means that investors will receive a single 1099-DIV form covering both payments.
ETF is negative. If all inflation accruals are distributed in the current year, you’re left with just the face amount and final coupon payment at maturity. As Zweig previously remarked:
Like all TIPS mutual funds, the iShares Fund pays inflation-adjusted amounts as income annually, while for individual TIPS, inflation adjustments accumulate as principal increases and are taxed upon realization.
This essentially suggests that if you buy IBIM for around $25 per share, you can expect to receive that same amount at maturity in 2036, but with periodic interest and inflation adjustments along the way.
To truly reap the benefits of compounded interest and robust inflation protection, all accruals ought to be reinvested into TIPS ETFs or similar products. This might be tricky, given the low trading volume. I don’t have personal holdings in these ETFs, but it seems platforms like Fidelity and Schwab offer reinvestment options, whereas Vanguard’s policy is less clear.
We’ve heard from readers about successful reinvestment of their dividends into these smaller funds, which is promising. If anyone has experience with these funds or insights on reinvestment, I’d love to hear about it.
Need for Cash Flow? In short, these ETFs provide a viable cash flow solution by annually disbursing both coupon interest and inflation accruals, which are taxable. However, if cash flow isn’t a concern for you and reinvesting dividends is your aim, a tax-advantaged account might be more suitable.
Final Thoughts
I currently own CUSIP 91282CPU9, which matures in January 2036, purchased with a long-term hold strategy in mind. Still, these TIPS ETFs could be appealing, particularly for those seeking easier taxable account investments.
An expense ratio of 0.10% is quite decent, especially with commission-free trading. However, do be cautious—using these ETFs within a managed account could eat into your annual returns. These products might have been designed with financial advisors in mind, many of whom might not fully grasp TIPS.
To sum it up, target maturity ETFs can be solid choices for cash flow and perform well in taxable accounts, and I personally don’t have major reservations about them.
PIMCO Introduces New ETF
On April 6th, investment firm PIMCO unveiled the PIMCO Inflation PLUS Active ETF. According to their press release,
PCPI aims to offer investors a direct hedge against rising inflation, with lower volatility and minimal interest rate risk compared to traditional TIPS.
This ETF focuses on short-term TIPS and actively manages portfolios to adapt to changing market conditions.
I can’t help but feel a bit skeptical; the term “actively managed” tends to raise red flags for me. Are we talking a handful of TIPS? With an expense ratio of 0.25%, it is notably higher than VTIP’s 0.03%, and its low maturity period of 0.5 years stands in stark contrast to VTIP’s 2.5 years.
This ETF is still new and lacks a solid trading history, which makes me hesitant. When I see “PLUS” in a fund’s name, I tend to question what’s behind it. Currently, its total assets sit at $55 million, a fraction compared to VTIP’s $6.8 billion. I would recommend steering clear of such a new and unproven fund.
Lessons from IVOL
Back in 2020, I wrote about a new ETF called “IVOL,” which aimed to serve as an inflation hedge. However, I never found its strategy appealing—it had a high expense ratio and a complicated hedging mechanism that was hard to grasp.
The fund performed well initially but later fell short compared to established TIPS, like Schwab’s U.S. TIPS ETF, which I prefer. The initial returns for IVOL were impressive, but in 2021, it lagged behind, especially given the stabilization of interest rates.
Ultimately, investors would have been better off with tried-and-true TIPS ETFs. IVOL has since been underperforming relative to U.S. inflation.
Conclusion
Be cautious about new investment options. While I see some potential in the new PIMCO ETF, I’m not convinced it’s a game changer. However, for those interested in simplifying their TIPS investments, the iShares Target Date ETFs are catching on.
• It’s a good time to develop your TIPS ladder
• Need tips? Check out my Q&A on TIPS
• Understand TIPS—know the terminology
• Considerations for the secondary market for TIPS
• TIPS for investors: Don’t overthink deflation risks
• Upcoming TIPS auction schedule
