Rieger Report: iShares iBond Municipal ETFs

Posted on by riegerreport

iShares iBond Municipal ETFs

I like the concept(s) and innovation that iShares by BlackRock has brought to the market with their municipal iBond offering:   Simply put, they work.

  • Design: The iBond ETFs are designed to mature like a bond & trade like a stock: By my count there has been 7 iBond Municipal ETFs that reached their final “maturity” and dispersed funds to investors in a similar fashion to a bond maturing
  • Result: An effective laddering tool for investors seeking low transaction cost exposure to specific maturity ranges
  • AUM: There is well over $1billion invested in the iBond Municipal ETFs
  • Quality: High quality tax-exempt exposure (82% by market value of the IBMN Dec 2025 iBond consists of AA and higher rated bonds)
  • Diversification: Each iBond Municipal ETF holds hundreds of bonds and no one State or issuer dominates
  • Yield: Impressively tight to the AA tax-exempt municipal bond market yield for each “maturing” year

iShares iBond Municipal ETFs

riegerreport_ishares_chart_012619

Sources: iShares by BlackRock. Table is shown for illustrative purposes only. Past performance is not indicative of future results. Data as of 1/25/2019.

iShares iBond Municipal ETFs

riegerreport_ishares_chart2_012619

Sources: iShares by BlackRock and BondWave. Table is shown for illustrative purposes only. Past performance is not indicative of future results. Data as of 1/25/2019.

How the iBonds by iShares work using the IBMN iBond Dec 2024 Municipal ETF as an example:

  • Maturity: IBMN Dec 2024 is designed to provide exposure ONLY to bonds maturing after December 31, 2023 and before December 2, 2024 instead of number of years maturity (i.e. 5 years)
  • When new issues that qualify sell in the primary market they are added to the ETF. So there is a “current market” reflection due to the new issue inclusion
  • The roll down affect: Since only 2024 bonds are included, next year this will represent a 4 year market segment
  • Bonds are sold if they no longer qualify due to qualification rules such as if the rating of the bond fell below investment grade

Benefits:

  • Simple, low cost exposure to high quality tax-exempt municipal bonds in specific maturity date ranges.
  • Efficient exposure as the fund is buying bonds at institutional spreads and not higher cost retail spreads

Drawbacks:

  • iShares management fee of 18bps, while low by any standard, still chews up some yield in this low rate environment
  • Acceptance and use of the “longer” iBond ETFs is a factor to consider

Innovation:

  • I look to iShares for more innovation as these tools grow in use and popularity

Sources and Analyst Disclosure

Sources:

Disclosure:

  • JR Rieger and or the Rieger Report LLC has not received compensation either directly or indirectly from the sponsor(s) of the ETF(s) included in this report.
  • At the time of this writing, JR Rieger does not own the ETF(s) cited in this report.

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