Bond Watch: locking in a fixed yield with an ETF

Welcome to interactive investor’s ‘Bond Watch’ series, covering the latest market and economic news – as well as analysis – that is relevant to bond investors.

Our goal is to make the notoriously complicated world of bond investing simpler, by analysing the week’s most important news and distilling it into a short, useful and accessible article for DIY investors.

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Here’s what you need to know this week.

BlackRock bond fund innovations

US fund group BlackRock has launched a range of “iBond” fixed income exchange-traded funds (ETFs) that behave like direct bonds.

The ETFs offer investors a fixed yield if held to maturity, but they can also be traded during the term of the ETF.

Four ETFs will be available:
iShares iBonds Dec 2026 Term $ Corp UCITS ETF

iShares iBonds Dec 2026 Term € Corp UCITS ETF

iShares iBonds Dec 2028 Term $ Corp UCITS ETF

iShares iBonds Dec 2028 Term € Corp UCITS ETF.

The ETFs aren’t on the interactive investor platform yet.

If held to maturity, as of 4 August 2023, they respectively yield 5.3%, 3.97%, 4.26% and 3.97%. The yearly ongoing charges are all 0.12% and the yields will change when the ETF’s price moves, with a higher price leading to lower yields, and lower prices increasing yields.

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Brett Pybus, global co-head of iShares fixed income ETFs at BlackRock, said: “iBonds ETFs are designed to mature like a bond, trade like a stock and diversify like a fund, all in a cost-efficient and transparent ETF wrapper.

“The fixed maturity nature of iBonds ETFs aims to offer investors clarity into their yield expectations and investment horizon. Bond ETFs are increasingly being used as an alternative to picking individual bonds, which can be costly for investors.”

The ETFs allow investors to lock in a yield from investment grade bonds, rather than owning a fund that is constantly buying and selling new bonds and will never mature.

Bonds boost sales at fund groups            

The reignited appeal of bonds due to higher yields is boosting sales at fund groups with expertise in the sector.

M&G and Royal London all made the top 10 in the latest “Pridham Report” for net sales for fund groups.

Their key bond funds include the Super 60-rated: M&G Global Macro Bond, M&G Emerging Markets Bond, Royal London Global Bond Opportunities and Royal London Sterling Extra Yield fund.

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This shows how retail investors and wealth managers are moving money into bonds, supporting data from the Investment Association (the funds industry trade body) on the growing popularity of the bond market.  

In June, fixed-income funds saw net inflows of £126 million, while mixed-asset funds (which contain bonds), saw inflows of £523 million.

UK Gilts was the best-selling sector, with net flows of £504 million, with Specialist Bonds in third place with £238 million of flows, and Government Bonds in fifth with net sales of £173 million.