Since the asset manager BlackRock launched the so-called iBonds ETFs in Europe under its iShares brand, investors have a new capital market instrument at hand. There are some differences to traditional money market funds. These two investment products have advantages and disadvantages.
• BlackRock launches iBonds ETFs in Europe
• Fixed maturity distinguishes new bond funds from money market funds
• Lower risk investment opportunity
Asset manager BlackRock recently launched the first iBonds ETFs in Europe. In the US, iBonds have had a firm place among the various corporate actions available to investors since 2010. Now the special bond funds have also found their way to Europe.
What are iBonds ETFs?
The iBonds ETFs are an investment product that has a fixed term and that invests exclusively in different bonds. If the fixed date is due, investors get their investment back. Until then, interest is paid on the stake, which makes the iBonds ETFs an interesting investment opportunity with comparatively less risk. Like other ETFs, iBonds can be bought and sold during their lifetime.
Specifically, BlackRock offers different versions of its iBonds ETFs. There are products with euro and dollar bonds. Otherwise, the various models differ in terms of their runtime. In Germany, for example, iBonds ETFs that run until December 2026 or December 2028 are offered. In addition, the composition of the bond funds varies and there are also the variants of distributing or accumulating with regard to the use of the stake.
What are money market funds?
Money market funds, often also called money market funds, are also investment funds. Investments are made exclusively in money market positions that have a short remaining term or a maximum term of twelve months. Specifically, this can be bonds, shares in other money market funds, certificates of deposit or else debentures be from companies or banks. Here, too, investors receive interest on their stake. As with iBonds ETFs, the interest rates are closely linked to the development of the key interest rates of the central banks. The biggest difference to BlackRock’s new investment product, however, is that classic money market funds are not terminated. So there is no fixed date on which the fund will be closed and all investors will get back their investment plus any interest.
Pros and cons of the two bond funds
Despite the focus on fixed-income securities, both investment products are not entirely risk-free. On the one hand, the bonds contained are subject to fluctuations, but the funds themselves can also vary in value, since they are traded on the stock exchange. In addition, it is possible that bond issuers held in the Funds could default, which would affect returns. In order to reduce this risk, however, bond funds rely on broad diversification on the one hand, and on the other hand bond issuers with good ratings are included in the portfolio in order to create further default protection.
Although both bond fund types are subject to the same risks and fluctuations described, the iBonds ETFs offer investors more planning security due to the fixed term. This also makes it easier for investors to calculate the expected return. Since money market funds can theoretically be held indefinitely, things are of course different here. The better planning security of the iBonds ETFs is also due to the fact that the funds are no longer changed after they have been launched, at least not as long as the values contained retain their investment grade status.
This is different for money market funds. These are actively managed, which can prove to be an advantage for investors. After all, this enables the portfolio manager to react to any changes in the market. If there are indications that a bond issuer’s situation is deteriorating, its bonds may be removed from the fund. Due to the unlimited term of classic money market funds, new values are continuously added to the portfolio while others expire. This makes the expected return correspondingly more difficult to predict.
iBonds ETFs and traditional money market funds also differ in their liquidity. Of course, both can be bought and sold at any time. However, while money market funds are very liquid, finding a buyer for iBonds ETFs could prove difficult. This is due to the fixed term. After all, the point of the product is to be held until maturity after purchase. For this reason, iBonds ETFs are not really suitable for trading.
Conclusion
In conclusion, both products, money market funds and BlackRock’s iBonds, are suitable for investors who want to invest their money for the longer term and earn interest in the process. In particular, investors who have assets of more than 100,000 euros can benefit. After all, only deposits of up to EUR 100,000 are legally protected at the bank in the event of bankruptcy. Everything about that could therefore flow into a new or classic money market fund if money is to be invested for the long term and interest should be earned at the same time.
Editorial office finanzen.net
This text is for informational purposes only and does not constitute an investment recommendation. finanzen.net GmbH excludes any claims for recourse.
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