Retirement Expert Eyes Five New iBond ETFs

Robert Powell — editor of TheStreet's Retirement Daily — often reviews exchange-traded funds for those saving for or living in retirement; in his issue, he looks at five new iBond ETFs that can help diversify the fixed-income portion of a portfolio and offer a higher rate of income return.

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iShares has launched five iBonds exchange-traded funds:

iShares iBonds 2021 Term High Yield and Income ETF (IBHA)
iShares iBonds 2022 Term High Yield and Income ETF (IBHB)
iShares iBonds 2023 Term High Yield and Income ETF (IBHC)
iShares iBonds 2024 Term High Yield and Income ETF (IBHD)
iShares iBonds 2025 Term High Yield and Income ETF (IBHE)

These ETFs buy high-yield corporate bonds. In this low-interest-rate environment, the search for yield -- especially to support retirees taking distributions to support their lifestyle -- is a challenge, says Steven Gattuso, a senior portfolio manager at Courier Capital.

The new iBonds offerings may contribute to a solution while mitigating some of the risk, says Gattuso. "The five new high yield bond funds comprise U.S. and possibly non-U.S., dollar denominated corporate bonds that are below investment grade -- that is, high yield," he says.

"The attraction of this asset class is that it can help diversify the fixed income portion of a portfolio and offer a higher rate of income return." Even in this low-rate environment, high yield returns somewhere in the high 4% to high 5% range, he says.

"The caution that goes with this is that there is greater risk with these types of bonds," says Gattuso. "In fact, in times of volatility they tend to act more like equities than fixed income so the potential for loss of value is greater than for bonds of higher quality companies or U.S. Treasuries."

Even though these ETFs are open-ended, what makes them different is that they each have specific maturities so each ETF acts like an individual bond; they each mature in December of the year stated. This offers, says Gattuso, a way to customize your exposure in this asset class while still benefiting from the diversification of a professionally managed portfolio of bonds.

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As the maturity date gets closer the proceeds from maturing individual bonds in the portfolio are held in cash or possibly investment grade bonds in anticipation of maturity when all proceeds are paid out, he says. "So, an investor can ladder these ETFs much like they would with individual bonds," says Gattuso.

"A conservative investor may allocate more on the near term maturities and achieve a decent rate of return while limiting exposure to price movement. These ETFs, he says, are well suited for a portion of retiree fixed-income portfolios who don't mind taking a little more risk to receive increased income. In addition, these ETFs are relatively low cost at 0.35%.

An alternative is Invesco's Bulletshares which operate similarly. Invesco purchased Guggenheim, who had been offering similar ETFs for years but the expenses are a bit higher at 0.42% and they do offer maturities to 2026, says Gattuso.