Van Eck Launches Short-Term Exchange-Traded Fund

Prompted by uncertainty and volatility in the municipal market, Van Eck Global Securities last week rolled out a short-term municipal exchange-traded fund in hopes of targeting investors that are seeking shelter by staying defensive amid the recent turmoil.

The Market Vectors-Lehman AMT-Free Short Municipal Index debuted on the American Stock Exchange under the ticker symbol SMB on Tuesday and is the latest ETF to be introduced as part of an ongoing trend that began picking up steam last summer.

The fund's arrival comes on the heels of Van Eck's January debut of a long municipal ETF and the December launch of its intermediate municipal ETF.

"It complements the first two funds in the market, and now we have a family of short, intermediate, and long ETFs," said Jim Colby, a senior municipal strategist at Van Eck.

Colby said the firm launched the short-term fund at a time when it felt investors would embrace it well.

"It came at a time when there was a great deal of concern over insurers and auction-rate securities and prices are dropping," he explained. "In times of uncertainty and volatility, people typically gravitate toward the short end."

"We thought a short ETF might be a point of departure for people thinking about the ETF acting as a bridge over the near-term concerns of the market or as a place to park some money until the dust settles," he continued.

The fund, which has a net expense ratio of 0.16%, offers exposure to investment-grade municipal bonds with a nominal maturity of one to six years, and is designed to replicate the price and yield performance of the Lehman Brothers AMT-Free Short Continuous Municipal Index - before fees and expenses.

In its second day of trading, the fund closed at $50.09 on Wednesday. It closed Friday at $49.43.

Colby said it will take a few weeks before the firm can track the fund's performance to the benchmark, but since it is comprised of investment-grade issues that closely mirror those in the Lehman index it should live up to expectations.

"We worked hard to structure the initial portfolio to do just that," he said.

The firm uses intraday bond pricing available through Interactive Data Corp. to price the bonds in their ETFs. The software uses end-of-the-day prices from the prior trading session and then prices thousands of bonds every 15 seconds based on movement in the London Interbank Offered Rate.

The short-term Van Eck fund is the latest in a series of ETFs to surface since last fall when Barclays Global Investors was the first asset manager into the space. It launched the iShares S&P National Municipal Bond Fund on Sept. 10. State Street Global Advisors followed suit three days later with its own SPDR Lehman Municipal Bond ETF. Power Shares Capital Management LLC, meanwhile, also came on board with two ETFs simultaneously - an insured national municipal bond portfolio and a national municipal bond portfolio.

Matt Fabian, managing director at Municipal Market Advisors in Boston, said there have been noticeably high inflows into the universe of new municipal ETFs since January.

Specifically, he noted that the short-term ETF launched by State Street on Oct. 15 has shown noticeable growth. Calls to the firm seeking comment on the fund were not returned.

The fund, which trades on the American Stock Exchange under the ticker symbol SHM, had $45.81 million in total net assets as of the close of trading on Wednesday, after being launched at just $13.57 million.

It opened at $23, and closed at a $21.456 Friday. The fund, which has a net asset value of $22.36, traded as high as $24.44 on Dec. 4 and as low as $22.36 on Dec. 13.

"I think it's the higher profile of munis" that is driving the demand, Fabian said. "Or, it could be investors getting away from managed money."

"The news of how safe munis are despite the insurers' troubles may be impelling new investors to look for opportunities in munis without the potential illiquidity of actually owning bonds," he said.

While Fabian said there has been some roughness in the newly chartered ETF waters, at the current time, there are opportunities.

"The indexes that these ETFs are trying to mimic are in such disarray, buyers earlier than a few weeks ago may have a hard time showing gains in the near term," he said. But, at the same time, he noted that MMA's municipal buy-sell indicator has been signaling a solid ETF buying opportunity for the past week.

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