Van Eck Global launched its first of several planned municipal bond exchange-traded funds yesterday that will track an index provided by Lehman Brothers. The Market Vectors Lehman Brothers AMT-Free Intermediate Municipal Index ETF will track an index that is composed of investment grade bonds with maturities between six and 17 years. “This is an exciting day for Van Eck as we are ringing the bell at the American Stock Exchange, but it took a lot of work to get to this point,” said James Colby, senior municipal strategist for Van Eck in a meeting yesterday morning at the exchange. “For a long time the municipal market has been in the back pages of market efficiency but now we are bringing it into the world of efficient electronic trading that is accessible to both the individual and the institution.” This ETF has an expense ratio of 0.20% with dividends paid monthly. It opened yesterday at $104.04 and closed at $104.05 with a trading volume of 200 shares. Barclays Global Investors iShares, State Street Global Advisors SPDR and PowerShares Capital Management LLC have also launched muni ETFs. Van Eck intends to launch five other ETFs shortly that will track the municipal market in the short-term, between one and six years maturity, the long-term market that will track maturities of 17 years and up, a New York-specific and California-specific ETF as well as a high-yield ETF. A spokesperson for the company said it expects to launch one more of the additional muni ETFs before the end of January. The company also has four more state-specific ETFs is registration with the Securities and Exchange Commission that will track debt from Massachusetts, Pennsylvania, New Jersey ,and Ohio. “It is extremely important to have a full family of funds that people can pick from,” said Harvey Hirsch, senior vice president at Van Eck. “The ability to one-stop shop and get all what you want from this asset class is what you will get with our family of funds.” Specifically, the intermediate ETF that is now trading under the ticker symbol ITM will track the Lehman Brothers AMT-Free Intermediate Continuous Municipal Index. To be included in the index, bonds must be rated by two of the major rating agencies. The threshold rating is Baa3 by Moody’s Investors Service or BBB-minus by Standard & Poor’s or Fitch Ratings. Bonds must have an outstanding par value of at least $7 million and be issued as part of a transaction of at least $75 million. They must be issued in the last five years.
Bonds subject to the alternative minimum tax, remarketed issues, taxable munis, floating rate bonds, or derivative products are not included in the index. As of Nov. 30, the index contained 13,126 issues and year-to-date return was3.74%. The credit quality of the index is 68% triple-A, 22.4% double-A and 7.1% single-A. The weighted average maturity is 11.16 years. Kellogg Capital Group LLC will act as the specialist and Interactive Data Corp. will provide the intra-day pricing for the ETF. Colby, who left Lord Abbett & Co. this summer to join Van Eck said that the firm chose to launch the intermediate fund first because it has the largest spectrum of credits to choose from. He noted that with the recent market volatility that the intermediate maturities are a part of the curve that investors are interested in. As to recent market volatility and the various periods of limited liquidity over the past few months, Colby does not think it will impact the ETFs ability to find bonds that match the index criteria. “The market is deeper than it was six or seven years ago and there are more players buying and selling bonds,” he said. “In fact, we view ETFs as solving the liquidity problem in that it will give people the liquidity they desire and the ability to move in and out of this market with ease.”One financial adviser agreed. “The focus on specific segments of the yield curve is a smart one because a lot of financial advisers look at an asset class in that fashion and make investment decisions based a lot on their opinions of the yield curve,” said Jim King, a private wealth manager at Balasa Dinverno & Foltz LLC in Illinois. “So these ETFs are definitely something we are researching heavily, especially given recent market volatility.” A majority of the national, state-specific and insured muni ETFs saw their share prices stay fairly steady over the past week up until Wednesday when prices decreased somewhat. This is likely a response Moody’s announcement that MBIA Insurance Corp. is at greater risk for a credit downgrade than first expected. Since its inception, the iShares national muni ETF, ticker symbol MUB, has traded in a tight range with a low of $99.67 and a high of $102.25. The State Street national ETF, ticker symbol TFI has traded within an even tighter range with a low of $21.83 and high of $22.54. PowerShares' insured national ETF, ticker symbol PZA, has traded since its inception at a high of $25.44 and a low of $24.65.
