Investing in a bond ETF with fixed maturity bonds

I have quite a bit of cash in my investment account at IB, which pays about 4.8% interest (on USD cash balances) at the moment. Looking for other options to park this cash, I came across a new iShares ETF (link), which yields about 8.3% annually until 2026.

The ETF was launched last month, and holds almost 400 different corporate bonds that all expire in 2026. The yield to maturity is 5.5% at the moment. However, the ETF trades at a discount to its NAV. You can buy it now for $4.60, but you’ll get $5.00 when the ETF is liquidated at the end of 2026. This boosts the expected return to 8.3% annually.

Does anyone have a decent grasp on how such ETFs would work?

I have some concrete questions about it:

  • Why does the ETF trade at a significant discount?
  • How would that discount evolve over time? I expect it to trend towards $5.00 the closer we get to the end of 2026. But if I want to sell before that, what are the odds that I have to sell for a lower price than what I pay now?
  • If a bond held by the ETF defaults, then that impacts the return of the ETF. Is this the main risk? Is it reasonable to expect to actually earn the 8.3% annually?
  • Do you think this is an interesting alternative to cash? Also if you’d only keep this amount of cash for only 6 to 12 months from now?

EDIT: I also found IBDR, which seems to be very similar and exists since 2016. Its NAV started at $25, and fluctuated between $23 and $27 since then. It’s pretty low now, at $23.50. The yield to maturity is also around 5.5%, but it has never traded at a discount.


Wouldn’t the answer here be the same as with any bond? Interest rate risk and default risk for corporate bonds?

This is the aggregate of the face-value of the bonds. I do not see in the link that they give the value of each bond in the open market where, interest rate risk and default risk would affect the value of the bonds.

Other bond funds like TLT fluctuate daily basis because of interest rate risk and do not include much in the way of default risk. Those risks do not go away for this ETF.

Just my take. I am not a bond trader with one of those handheld calculators that can adjust the value of a bond based on today’s interest rate.

Or another way to put it. I just watched the Big Short again and plan on reading the book. I am not 100% sure that Dr. Burry is not shorting some of those individual bonds or even this fund now (even if it would be difficult for a retail investor). There is clearly some risk no matter how you slice it.


Default risk would be relevant indeed, but interest rate risk isn’t I think. If you hold the ETF until maturity, it’s the same as holding all its underlying bonds to maturity. It doesn’t matter if the interest rate changes in the future, because all future cash flows are already fixed (except for defaults, and some index rebalancing effects like when a bond is downgraded below BBB).

IBDR tracks the same index and does not trade at a discount. IBDR has a far larger amount of assets, and exists for much longer. If default risk is significant, then IBDR would also have to trade at a discount.

There is interest rate risk in the sense that you might miss out if rates rise more. With this ETF, you basically lock in the current rate, just as if you’d buy a single bond.

I think you’re confusing the price marked in euros with those marked in dollars.


In addition, IBDRs have some equity risk, which is not an actual cash substitute.

You are absolutely right! The ETF is traded on the German stock exchange with a price in euros, but the NAV is in US dollars.

Only 5.5% yield instead of 8.3% makes it a lot less interesting, especially compared to the 4.8% I get from IB without doing anything and reasonably risk free.