Locking in High-Yield Returns Before 2027: How Structured Term ETFs Like IBHG Offer Predictable Income in a Volatile Market

In today's fixed-income landscape, where interest rates remain elevated and credit spreads tighten, investors are increasingly seeking tools to secure predictable income while minimizing exposure to market volatility. Structured term ETFs, such as the iShares iBonds 2028 Term High Yield and Income ETF (IBHG), offer a compelling solution. These instruments combine the benefits of corporate bond yields with a defined maturity date, enabling investors to lock in returns and reduce duration and credit risk in a way that traditional bond funds cannot.

The Case for Structured Term ETFs

Structured term ETFs like IBHG are designed to hold a diversified portfolio of investment-grade corporate bonds that mature in a specific year—in this case, 2028. By aligning the ETF's maturity with a fixed timeline, investors gain clarity on when their principal will be returned, reducing the uncertainty of reinvestment risk. This structure is particularly advantageous in a rising rate environment, where longer-duration bonds face greater price volatility.

IBHG, for instance, offers a 6.51% annual dividend yield, derived from its underlying portfolio of investment-grade corporate bonds. The fund's expense ratio of 0.35% is competitive, and its market-cap-weighted approach ensures broad diversification across sectors and issuers. Crucially, the ETF is structured to transition its holdings into cash equivalents in the final year before maturity, ensuring that investors receive their principal intact in December 2028. This design significantly curtails interest rate risk, as the fund's sensitivity to rate changes diminishes as it approaches its maturity date.

Mitigating Credit and Duration Risk

One of the primary concerns in fixed-income investing is credit risk—the possibility that bond issuers may default or be downgraded. IBHG mitigates this by holding only investment-grade corporate bonds (BBB- or higher), which have historically exhibited lower default rates than high-yield bonds. The fund's portfolio turnover rate of 17% further ensures that it remains aligned with its benchmark index, the Bloomberg December 2028 Maturity Corporate Index, while maintaining cost efficiency.

Duration risk, which measures a bond's sensitivity to interest rate changes, is also minimized. With an average maturity of just over five years (as of August 2025), IBHG's duration is shorter than most corporate bond funds. This means that even if rates rise before 2028, the ETF's price will not fluctuate as dramatically as longer-duration alternatives. Additionally, the fund's transition to cash equivalents in 2027 ensures that investors are insulated from rate hikes in the final year of the fund's life.

The Role of Cash Equivalents in Final-Year Returns

A critical factor in the total return of structured term ETFs is the yield earned on cash equivalents during the final year before maturity. As bonds in the portfolio mature, their proceeds are reinvested in short-term instruments such as U.S. Treasuries or money market funds. If the yield on these cash equivalents is lower than the current average yield to maturity of the ETF's bonds, the realized yield will be reduced. Conversely, if short-term rates rise, the ETF's returns could exceed expectations.

For example, if the Federal Reserve continues its rate-cutting cycle into 2027, as many analysts anticipate, the yield on cash equivalents may decline. However, the ETF's structure allows investors to lock in a baseline return based on the Estimated Net Acquisition Yield (ENA Yield), which factors in current rates and the fund's expense ratio. This tool, available through the iBonds ETF Ladder Tool, enables investors to model potential outcomes and make informed decisions.

Strategic Applications for Income-Seeking Investors

Structured term ETFs like IBHG are particularly well-suited for investors with a specific time horizon, such as those planning for retirement or other near-term expenses. By incorporating these ETFs into a bond ladder strategy, investors can stagger their maturity dates to maintain a steady income stream while avoiding the need to constantly rebalance a portfolio of individual bonds.

For example, an investor could pair IBHG with other iBonds ETFs maturing in 2025 (IBHE) and 2026 (IBHF) to create a multi-year ladder. This approach not only diversifies exposure to different maturity years but also ensures that a portion of the portfolio remains insulated from rate fluctuations at any given time.

Risks to Consider

While structured term ETFs offer significant advantages, they are not without risks. Credit risk persists, albeit at a lower level than high-yield bonds, and a downgrade or default by a major issuer could impact performance. Additionally, if an investor sells the ETF before maturity, they may face capital gains or losses depending on market conditions. However, the fund's design—returning principal at maturity—provides a level of certainty that is rare in the fixed-income market.

Conclusion

In a world where traditional bond funds struggle to balance yield and risk, structured term ETFs like IBHG present a compelling alternative. By offering a high dividend yield, predictable maturity, and reduced exposure to interest rate and credit risk, these instruments enable investors to secure income with confidence. As we approach 2027, the key will be to monitor short-term interest rate trends and ensure that cash equivalents are positioned to enhance, rather than erode, returns. For those seeking to lock in high-yield returns while navigating a volatile fixed-income landscape, structured term ETFs are a strategy worth considering.