Browsing Category

ETF

ETF Individual Bond Municipal Bond Mutual Fund News

November 2011 Municipal Bond and Tax Free Mutual Funds News – Property Tax Refunds, Fidelity FCSTX Report

municipal bonds

This month saw more of news about financial market volatility.  The Month’s municipal bond news included:

  • 11/04: Tax Win Inspires Copycats – WSJ.com – Affluent Lake Tahoe homeowners won a record $43 million in property tax refunds and are trying to get more. The problem was that Washoe County assessed home values using their own techniques instead of market values. Other counties around the US may be susceptible to this same tactic, significantly affecting the finances of a given county.
  • 11/04: Fidelity California Short-Intermediate Tax-Free Bond Fund (FCSTX) Semiannual Report – Municipal bonds generated solid gains for the six-months period ending August 21, 2011 mainly because of investor demand and reduced muni bond supply. Fundamentals improved and expenses were slashed in many municipalities. Even out of state investors purchased California munis. One problem area was their Puerto Rico muni bond holdings.
  • 11/10: Jefferson County, Alabama finally filed for bankruptcy. This is the largest municipal bankruptcy yet and was no surprise. Problems were due to bond issuance deals to upgrade its sewer system that soured amid widespread corruption, bribery and fraud charges that led to some 22 convictions.
  • 11/11: Smart Money’s Jack Hough thinks munis are worth a look. He is bullish due to recent strength in lite of Jeffereson Country bankruptcy and Euro zone problems, and other factors.
  • 11/11: Superdowngrades or multi-notch downgrades of muni bonds are occuring because ratings firms do not review each bond’s finances regularly.
  • 11/14: Cities are using Muni Bond money to pay for other things. Audit Investigations are going on and lawsuits are flying.
  • 11/23: Muni Bond ETFs have held there own and are slowly growing more popular.  Mutual funds still dominate the category.
  • 11/25: Harrisburg had their bankruptcy petition thrown out by the court as they violated state laws by doing so. Pennsylvania now will pursue a plan to put Harrisburg into state receivership.
  • 11/30: Jefferson Counties’ bankruptcy will test whether ‘previously safe’ revenue muni bonds will continue to get paid while in bankruptcy.
ETF Municipal Bond Mutual Fund News

November 15-19, 2010 Municipal bond Mutual Fund outflow

municipal bonds

Last week’s (November 15-19, 2010) massive Municipal bond Mutual Fund outflow of $4.78 billion make the headlines. The outflow was the largest on record. 66% of municipal bonds are owned by individual investors, the balanced owned by large institutional investors. This is another danger of owning municipal bond mutual funds rather than individual bonds. We have written about these municipal bond mutual funds dangers in the past.

It is clear that investors are nervous and are ready to rapidly yank money out when any problem occurs. The additional bond offerings that increased supply may have been a catalyst to start the decline.

Morningstar has some municipal bond mutual fund recommendations.

Muni bond ETF’s had an even rougher time with some trading below their net asset value.

Envision Capital’ s Marilyn Cohen wrote that investors need to learn from this and move towards individual issues.

See how the Vanguard California intermediate term municipal bond fund (VCAIX) performed:

Education ETF Mutual Fund

What are Municipal Bond Exchange Traded Funds or ETFs

bonds, municipal bonds, bond poster

Municipal bonds have joined the ranks of Exchange Traded Funds or ETF’s in recent years. There are several ETFs that invest in a variety of different municipal bonds.

Among the municipal bond ETF’s are:

Short-Term National Municipal Bond ETFs

iShares S&P Short Term AMT-Free National Municipal Bond Fund (SUB)
Market Vectors-Lehman Brothers AMT-Free Short Municipal Index ETF (SMB)
PIMCO Short Term Municipal Bond Strategy Fund (SMMU)
PowerShares VRDO Tax-Free Weekly Portfolio (PVI)
SPDR Lehman Short-Term Municipal Bond ETF (SHM)
SPDR S&P VRDO Municipal Bond ETF (VRD)

Intermediate-Term National Municipal Bond ETFs

Grail McDonnell Intermediate Municipal Bond ETF (GMMB)

Market Vectors Pre-Refunded Municipal Index Fund (PRB)
PIMCO Intermediate Municipal Bond Strategy Fund (MUNI)

Long-Term National Municipal Bond ETFs

iShares S&P National Municipal Bond Fund (MUB)
Market Vectors-Lehman Brothers AMT-Free Long Continuous Municipal Index (MLN)

Market Vectors’ High-Yield Muni ETF (HYD)
PowerShares Insured National Municipal Bond Portfolio (PZA)
PowerShares Build America Bond Portfolio (BAB)
SPDR Lehman Municipal Bond ETF (TFI)

End-Date National Municipal Bond ETFs

iShares 2012 S&P AMT-Free Municipal Series (MUAA)
iShares 2013 S&P AMT-Free Municipal Series (MUAB)
iShares 2014 S&P AMT-Free Municipal Series (MUAC)
iShares 2015 S&P AMT-Free Municipal Series (MUAD)
iShares 2016 S&P AMT-Free Municipal Series (MUAE)
iShares 2017 S&P AMT-Free Municipal Series (MUAF)

State-Specific Municipal Bond ETFs

iShares S&P California Municipal Bond Fund (CMF)
iShares S&P New York Municipal Bond Fund (NYF)

PowerShares Insured California Muni Bond (PWZ)

SPDR Barclays New York Municipal Bond (INY)
PowerShares Insured NY Municipal Bond Portfolio (PZT)
Credit: Seeking Alpha

New and Untested

These new ETF’s are untested and fairly new. Most are thinly traded (iShares ETF generated a low $170k a day) but have reasonable expense ratios from 0.25% to 0.35%. These ETFs trade throughout the day like stocks and their pricing usually closely matches their net asset value. There are not a lot of different funds, meaning that you won’t find single state variants in short, intermediate, and long maturities. The assets currently in municipal bond ETFs are $8 billion of a $2.8 trillion market.

Interesting Funds

Unlike traditional bond mutual funds, some End Date ETFs have target maturity dates that hold their portfolio to maturity, then returned the bonds principal and terminate the fund. This is good if you need money for a specific date, i.e. college, retirement, etc. The strategy also prevents a lot of turnover in bonds, causing variations in net asset value.

A problem arises when people buy and sell shares, the fund’s investments could change if interest rates fall, leading to a smaller distribution. Also bonds could mature throughout the target maturity year, so cash would have to be invested while waiting for all bonds to mature.

Volatility

In the middle of November 2010, the municipal bond market encountered some rough waters causing municipal bond ETFs to trade 2% to 2.4% below net asset value of their bonds. Experiences like these will occur from time to time, so investors need to understand and take advantage of volatility. Frankly we would avoid municipal bond ETFs and stick to mutual funds, until they become more established.

Hedging and Shorting Municipal Bonds

ETFs can be shorted, acting like a hedge or insurance against downside for those owning municipal bonds or municipal bond mutual funds. This can be used as portfolio insurance.  Municipal Bond Credit default swaps or CDS are used by large firms as protection against default but are sold in units in the millions of dollars.  Their value rises as the risk in the muni bonds goes up.

Additional Related Municipal Bond Educational Articles:

What are municipal bonds?
How to Research Municipal Bonds
The Risks of Owning Municipal Bonds
How to Buy And Sell Municipal Bonds
Municipal Bond Mutual funds – Municipal Bond Managed Accounts
What Are Closed-end Municipal Bond Funds?

What are Municipal Bond Exchange Traded Funds or ETFs
How to Make a Municipal Bond Ladder
How to Select Municipal Bonds
Municipal Bond Trading Example
How to Perform Active Municipal Bond Management
Municipal Bond Books and Educational Resources