What is a closed-end municipal bond fund?
A closed-end municipal bond fund is an investment that holds municipal bonds, but trades like a stock. The price of the closed-end fund changes throughout the day with the price of the fund varying from the actual net asset value. It may trade at a premium or discount to its actual intrinsic value. Most funds have active management whose fees are calculated as a percentage of assets managed, not investor money invested. They have high expense ratios above 1%. The price of the fund is affected by demand and market factors.
Approximately 88% of closed-end bond funds use our own money or leverage to pump up income. This causes more volatility. In 2008 these funds fell hard despite a relatively stable intrinsic portfolio. Citibank has been investigated for using leverage on a Muni arbitrage trust fund. Some funds use as much as 8 to 1 leverage, which can backfire in falling markets. Thomas J Herzfeld Advisors are the experts in this area.
During the week of November 15, 2010 the average closed end Muni bond fund traded at a 5% discount at the start of the week, then ended up at a more normal 1.1% discount. Considering some of these funds only yield 5% over the course of a year, this is some huge volatility.
Examples of closed and municipal bonds funds include Black Rock’ s [MUH] and Invesco’s [IQM]
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