James Colby, senior municipal strategist at Van Eck Global, admits the timing is pretty fortuitous.
Through its Market Vectors brand, Van Eck tomorrow will launch a pre-refunded muni exchange-traded fund to be traded on the New York Stock Exchange's Arca platform.
The launch comes just as demand for pre-refunded munis is white-hot.
Although Colby said he did not plan it this way, the yield on the five-year pre-refunded muni has tumbled two full percentage points in the past three months.
Pre-refunded munis returned 6.8% in 2008, compared with a 2.5% drop for the muni market as a whole, according to the Barclays Capital indexes tracking the respective bond types.
Van Eck touts the pre-re ETF as a liquid way to collect tax-free yields with the credit reliability of the U.S. government. The ETF's slogan is: "Munis for the Risk-Averse."
When a municipality wants to call a bond before it is eligible to be called, the issuer can "pre-refund." That means buying a batch of Treasuries with the same par value and maturity as the munis and keeping the Treasuries in escrow.
The escrowed Treasuries then cover the coupon payments on the muni and the principal upon maturity.
This asset has been on fire in the past few months because of the surge in Treasuries, as volatility in stock and credit markets scared investors into safe havens.
The Pre-Refunded Municipal Index ETF, which will trade under the symbol "PRB," seeks to mirror the Barclays Capital Municipal Pre-Refunded-Treasury-Escrowed Index.
It does this by backing the publicly traded shares with a Van Eck-advised portfolio of pre-refunded bonds in the index.
Van Eck's job is to make sure the net asset value of the portfolio mimics the index.
That involves reinvesting principal when bonds mature and picking the right sampling of bonds to reflect an index with 3,925 issues.
This is not always easy. Last year, many of the 15 muni ETFs suffered dislocations between the index and the asset values of the portfolio, and between the portfolio and the shares.
Colby said he does not anticipate this with the pre-refunded ETF.
Pre-refunded munis are more liquid than other kinds of munis, he said, and, backed by the Treasury, have the best credit quality.
"This ought to be one of the easier ETFs to cobble together," he said. "Pre-res are a very liquid item. ... This ought to trade very well because of the underlying credit quality of the project itself and its liquidity as a fixed-income product."
The pricing service in charge of evaluating the portfolio's value, Interactive Data Corp., should have an easy time, he said.
Kellogg Group, which is also providing the seed money for the first incarnation of the ETF's underlying portfolio, is the specialist for the shares.
The fund will carry an expense ratio of 0.24%, which is similar to Van Eck's three other muni ETFs.
It will pay dividends from the portfolio's investment income. Colby said the dividends generally will be similar to taxable Treasury yields on a pretax basis. Right now, the index the ETF will try to track has a yield of 1.48%.
During the worst of the market turmoil, yields on pre-refunded munis significantly eclipsed yields on Treasuries.
The yield on the five-year pre-re more than doubled the yield on the five-year Treasury on Dec. 16, according to Municipal Market Data.
The two yields have since converged. The five-year pre-re now yields 90.4% of the five-year Treasury, according to MMD.
