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.
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.
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