iShares Expands Muni Bond ETF Ladder Strategy

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BlackRock's iShares is expanding on its suite of Muni Bond target-date ETFs to help investors extend their muni bond ladder strategy to hedge rate risk ahead.

The recently launched iShares iBonds Dec 2024 Term Muni Bond ETF (Cboe: IBMM), which has a 0.18% expense ratio, will help investors prolong their muni bond ladder strategy as the iShares iBonds Sep 2018 Term Muni Bond ETF (NYSEArca: IBMG) is set to mature at the end of August this year.

IBMM tries to reflect the performance of the S&P AMT-Free Municipal Series Dec 2024 Index, which is comprised of investment-grade, non-callable U.S. municipal bonds maturing in 2024. The fund will help investors gain exposure to tax-exempt income, expand on a bond ladder and manage interest rate risk.

These defined-maturity bond funds typically buy bonds that mature in the year the ETF will terminate, ensuring that investors can collect the bonds’ face value at maturity, along with a steady income stream along the way. Consequently, investors are meant to buy-and-hold these securities until maturity.

iBonds Target-Date ETFs to Help Maintain a Steady Income Stream

“iBonds ETFs are designed to provide a yield-to-maturity profile comparable to that of the underlying bond portfolio and seek to preserve an investor’s anticipated yield-to-maturity through a combination of monthly distributions and a final end-date distribution,” according to iShares.

In comparison, most bond ETFs that many are familiar with run the risk of losing their original principal if interest rates go up, depending on the bond ETF’s effective duration, since the typical bond funds would buy and sell debt securities to maintain their target short-, intermediate- or long-duration strategy.

While financial advisors and investors have implemented this strategy through individual debt securities, crafting bond ladders with individual bonds can be time consuming and cost prohibitive. Alternatively, investors can utilize target-date bond ETFs to easily create a bond ladder strategy.

By using target-date bond funds, a fixed-income investor could create a bond ladder strategy in a portfolio with varying maturity dates. The bonds’ maturity dates are evenly spaced across several years so that the proceeds from maturing bonds may be reinvested at regular intervals.

For more information on new fund products, visit our new ETFs category.

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