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Investing Blog Roundup: iShares Defined-Maturity TIPS ETFs

If you want to know, in advance, that you’ll have a specific amount of purchasing power available on a specific date in the future, Treasury Inflation-Protected Securities (TIPS) are the tool for the job.

And if you want to know, in advance, that you’ll have a specific amount of purchasing power available each year for many years, a ladder of TIPS is the right tool for the job.

TIPS mutual funds, while they can be a useful tool, generally can’t do either of those jobs. That’s because TIPS mutual funds keep buying new bonds. So if you were to plan to sell your shares of the TIPS mutual fund at any specific date in the future, there’s no way to know what price you’ll get (because you’re essentially selling bonds prior to maturity).

Earlier this year, Allan Roth challenged the fund industry to implement a fund that could be used as a TIPS ladder. John Rekenthaler of Morningstar argued in favor of the idea as well.

And last month, BlackRock released a lineup of TIPS ETFs that can be used in such a way. They’re called iShares iBonds ETFs. (I hate the name due to the obvious potential for confusion with Treasury I Bonds. But BlackRock didn’t ask me, and the name is of course not the most important point here.)

The idea is that each ETF basically just buys bonds that mature in a specific year — and only that year — and then holds those bonds to maturity. And that’s it. So each ETF can essentially act as a stand-in for one rung of a bond ladder.

It’s a neat idea. I’m happy that they exist. I’d love to see BlackRock extend the lineup out beyond the current 10-year limit. And I’d really be interested to see a fund that actually implements a whole ladder for you.

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