IBDN: try a term fund instead of a money market fund
With signs and warnings of recession all around us, investors injected liquidity into money market funds at an accelerating pace while exiting bonds and stocks. There are several alternatives in the space now outside of traditional funds: an investor can choose between rolling treasury bills (which eventually pay something back), a short-duration corporate bond fund, or a short-duration treasury bill fund. A new alternative that provides de minimis exposure to interest rates (in fact none of the holding periods is 6 months or longer) is term funds.
The iShares iBonds Corporate ETF December 2022 (NYSEARCA:IBDN) is a fund that holds corporate bonds with a maturity date until December 2022. Essentially, the fund holds bonds with very short maturities and is designed to return principal to investors once the bonds mature. deadline. This ETF is different from the PIMCO Enhanced Short Maturity Active ETF (MINT) because it has a term structure – that is, it is meant to mature on a specific date. The fund was launched in 2015 and, from its inception, it bought bonds with a predetermined maturity. This type of fund deals with interest rate risk thanks to its defined maturity schedule. A typical bond fund maintains a constant duration profile, replacing maturing bonds with new ones that have a defined duration profile. Term bond funds simply let the collateral mature and then return the principal to shareholders.
IBDN is expected to fully unwind and return principal to shareholders by the end of December 2022. The fund currently has a 30-day SEC yield of 1.94% and virtually zero interest rate risk due to its investment profile. very short deadline. Since the portfolio is entirely investment grade, there is little to no risk of default here over the next 6 months, and this investment is best served for an investor looking to store cash for 6 months. IBDN can also serve as an arbitration vehicle in the event of market dislocation. As we saw in June, sharp market corrections are accompanied by wide bid/ask spreads on bonds and the propensity to panic of some market participants. This may result in a lower dislocation in the price of the fund.
The fund is entirely composed of investment grade bonds:
If we look at the composition of the collateral, we notice that indeed all the bonds mature before the end of the year:
We can notice that the collateral has a staggered maturity profile, with each bond maturing on separate dates, as per their original offering documents.
There are now 169 bonds left in the collateral pool, and that number will continue to decline as the securities mature and principal is repaid.
Unlike short-term bond funds or the global market, IBDN has shown a stable performance since the beginning of the year due to its duration profile:
The advantage of term funds is the shortening of the duration profile as bond maturities approach. Basically, you’ll get your principal back, regardless of how the yield curve performs, and maturing principal is held in cash rather than reinvested in long-duration bonds. Essentially, buying a term fund is like buying a bond with a maturity date, but with the only benefits of diversification.
We can see a similar stable performance over the past five years:
The Covid crisis represented a massive drop due to concerns about actual defaults in the collateral pool. An actual default would result in a permanently lower NAV, hence a weaker price dislocation.
With recession flags all around us and a stock market that has entered bearish territory, many investors are looking to overweight cash. Parked cash can take a myriad of forms ranging from short-term bond funds to outright rolling of treasury bills. We highlight another vehicle that can be used for this purpose, namely bond term funds. With a very short maturity profile and a collateral pool expected to mature by December 2022, the iShares iBonds Dec 2022 Corporate ETF serves this purpose. The fund has a 30-day SEC yield of 1.94% and a pure Investment Grade collateral mix. There is virtually no credit or interest rate risk here given the term to maturity (less than 5 months). An investor looking for alternatives would be well placed to know about this fund and corporate bond futures funds generally.