Brand New Defined-Maturity Bond ETFs to Consider

bond fundsWhen it comes to defined-maturity corporate bond ETFs, Guggenheim’s BulletShares have been the go-to place for investors.  In an environment in which many investors fear rising rates but also aren’t willing or able to create a diversified portfolio of individual bonds, corporate bond funds designed to behave like individual bonds seem like a great idea.  It is such a good idea that BlackRock now wants in.

  To see a list of high yielding CDs go here.  

Back in 2010, BlackRock first dipped its toe into the defined-maturity-ETFs water with several municipal bond ETFs.  But it was only three months ago that BlackRock finally launched its first corporate bond defined-maturity ETFs.  Those four funds, with April 17, 2013 inception dates, are iSharesBond Corporate ex-Financials Term ETFs.  If you wanted a more complete look to your iShares defined-maturity ETF, you were still out of luck . . . until last week.  On July 9, 2013, iShares was at it again, launching four brand new corporate bond defined-maturity ETFs.  And these new ETFs include financials.  For a list of iShares’ eight corporate bond defined-maturity ETFs, see the table below:

Name

Ticker

Inception Date

iSharesBond 2016 Corporate ex-Financials Term ETF

IBCB

4/17/2013

iSharesBond 2018 Corporate ex-Financials Term ETF

IBCC

4/17/2013

iSharesBond 2020 Corporate ex-Financials Term ETF

IBCD

4/17/2013

iSharesBond 2023 Corporate ex-Financials Term ETF

IBCE

4/17/2013

iSharesBond 2016 Corporate Term ETF

IBDA

7/9/2013

iSharesBond 2018 Corporate Term ETF

IBDB

7/9/2013

iSharesBond 2020 Corporate Term ETF

IBDC

7/9/2013

iSharesBond 2023 Corporate Term ETF

IBDD

7/9/2013

 

Are these ETFs worth buying?

Before jumping on board the corporate bond defined-maturity ETF bandwagon, ask yourself whether you actually need this product.  Take a look at the percentage of bonds rated single-A or higher by S&P and Moody’s in each of the eight aforementioned iShares ETFs.

Name

Percent Single-A or Higher S&P/Moody’s

iSharesBond 2016 Corporate ex-Financials Term ETF

81.34% / 77.60%

iSharesBond 2018 Corporate ex-Financials Term ETF

78.26% / 77.06%

iSharesBond 2020 Corporate ex-Financials Term ETF

80.04% / 78.52%

iSharesBond 2023 Corporate ex-Financials Term ETF

81.81% / 80.14%

iSharesBond 2016 Corporate Term ETF

71.95% / 58.34%

iSharesBond 2018 Corporate Term ETF

63.30% / 51.49%

iSharesBond 2020 Corporate Term ETF

63.57% / 50.92%

iSharesBond 2023 Corporate Term ETF

57.46% / 46.09%

 

The iShares ETFs listed above have roughly 100 to 200 holdings each and are investment-grade focused funds with, in some cases, extremely heavy exposure to single-A-or-higher rated notes.  I would argue that investors with the wherewithal to diversify across as few as 20 or 30 investment grade issues could easily see performance in-line with, if not better than, iShares, Guggenheim, or anyone else’s investment grade corporate bond defined-maturity ETFs.  If we were discussing high-yield defined-maturity ETFs, it may be a different story.  But in the investment grade space, I am not sure I need the type of diversity provided by the funds while either limiting myself to one particular year or dealing with the transaction costs associated with slowly building positions in multiple funds over time.

Regarding the newest four ETFs in particular, if you think one or more of the funds is worth buying, I would at least caution you to wait until the huge current premiums to net asset values dissipate.  As seen in the table below, as of July 12, 2013, the premiums at which the funds were trading relative to their net asset values were quite large.

Name

Premium Over NAV

iSharesBond 2016 Corporate Term ETF

3.656%

iSharesBond 2018 Corporate Term ETF

3.874%

iSharesBond 2020 Corporate Term ETF

3.988%

iSharesBond 2023 Corporate Term ETF

3.473%

 

The funds may seem like they have attractively small expenses, with expense ratios of just 10 basis points.  But paying a 3% to 4% premium to net asset value, essentially a transaction cost/expense, is, in my opinion, simply unacceptable.

In closing, I like the fact that ETF providers, through defined-maturity ETFs, are trying to get bond fund investors to think like individual bond investors.  Especially in an environment in which many fear rising rates, the benefits of being able to hold bonds to maturity is worth bringing to the fund world.  But while I see value in creating defined-maturity funds focusing on the high-yield portion of the corporate bond market, as a long-term-oriented bond investor, I still can’t seem to bring myself to jump on board the investment grade corporate bond defined-maturity ETF train.  To change my mind, I need to be convinced those products can do something for my portfolio that I can’t do.

One example might be to provide access through the funds to a large number of bonds that I can’t buy on my own.  With that in mind, here’s a closing thought for ETF providers: Create an investment grade corporate bond defined-maturity ETF focused on private placements.  Yes there would be some quirks associated with that, such as what to do with a bond when the private placement is registered (as so many eventually are) or how to create a fund with enough diversity.  But I am sure ETF providers can work through those quirks to create a compelling investment opportunity that even bond investors who prefer to go the individual bond route could embrace.

More from The Financial Lexicon:

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Comments

  1. RL Schmidt says

    IBCE is at $92.00. Does this mean to buy, or to run for the hills?!!! I really dont understand how you can have these low prices: ie dont they all expire at par?

    I own tons of indiv. bonds but would love to buy these funds. Unfort I dont feel comfortable at this point.

    Thanks for the very good articles you provide.

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