Tucker points out that while municipal bond mutual funds saw outflows in 2011, municipal bond ETFs took in some $700 million in new money. "In an uncertain credit environment, investors want to see what they're holding. They want diversification. And they want intra-day liquidity. Municipal bond ETFs offer all of those things."
Muni Bond ETFs Join The Charge For Yields
February 3, 2012
Weighing The Options
For those considering municipal ETFs, available options cover a wide variety of durations, credit qualities and geographic locations.
At $2.4 billion in assets, the iShares National Municipal Bond Fund is by far the largest member of the group. The fund, which has a 0.25% expense ratio and a seven-year duration, is spread across some 1,500 holdings. At 40% of assets, California and New York state issuers dominate. The $1 billion SPDR Nuveen Barclays Capital Municipal Bond ETF (TFI) has a slightly longer nine-year duration, a 0.23% expense ratio and a 30% weighting in New York and California bonds. Both funds have posted similar total returns over the last three years.
The $1.4 billion SPDR Nuveen Barclays Short-Term Municipal Bond ETF fund (SHM) appeals to investors looking for a shorter-term option. Its duration is just shy of three years, and it has a 30-day SEC yield of 0.80%.
With interest rates falling over the last three years, longer-term bonds have been the most profitable area of the fixed-income market, and munis are no exception. Fans of a belt-and-suspenders approach have gravitated to the PowerShares Insured National Municipal Bond Portfolio (PZA), which has collected more than $550 million since its introduction four years ago. Most of the 175 bonds in the portfolio are rated "AA" by Standard & Poor's. The portfolio has a duration of 12 years and a recent yield of 4.13%. Another long-term muni ETF, the Market Vectors Long Municipal Index fund (MLN), has a 30-day SEC yield of 4.3%, which translates into a taxable equivalent yield of 6.63% for someone in the 35% federal tax bracket.
In the high-yield space, the Market Vectors High Yield Municipal fund (HYD) sports a yield of 5.77%, representing a taxable equivalent yield of 8.9% for someone in the 35% federal tax bracket. Based on the Barclays Capital Municipal Custom High Yield Composite Index, the fund tracks the high-yield municipal bond market with a 75% weight in non-investment-grade municipal bonds and a 25% weight in "Baa"/"BBB"-rated bonds, the lowest investment grade. At the other end of the safety spectrum, the firm's Pre-Refunded Municipal fund (PRB) invests in municipal securities secured by Treasurys held in an escrow account. Because of the airtight guarantee of repayment and low risk, the yield on the offering is a modest 0.56%.
Other offerings focus on taxable municipal securities issued under the Build America Bond program as a way to lower borrowing costs for state and local governments. Three such funds are the PowerShares Build America Bond Portfolio fund (BAB), the SPDR Nuveen Build America Bond fund (BABS) and the PIMCO Build America Bond Strategy fund (BABZ). With yields of about 5%, these portfolios consist mainly of securities rated "A" or better by Standard & Poor's.
In a new twist, target-dated municipal bond ETFs from iShares offer both the diversification of a bond fund and a known maturity date. The goal is for ETF holders to get monthly income during the life of the fund and a return of their original investment when the bonds mature in a specified year from 2012 to 2017. The firm has filed two new ETFs with the SEC that mature in 2018 and 2019.
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