Against a backdrop of investors continuing to pull money from tax-exempt bond funds, the municipal market’s first-ever exchange-traded fund to focus specifically on closed-end muni funds has launched.
Van Eck Global kicked off a fund-of-funds, the first in which the underlying closed-end bond funds focus specifically on munis. Branded the Market Vectors CEF Municipal Income ETF, it aims to replicate the S-Network Municipal Bond Closed-End Fund Index before fees and expenses.
Launched earlier this week, the fund comes to market just as investors pulled a net $272 million from muni bond funds during the week ended July 6. And while muni funds saw inflows for three out of the four past weeks, outflows had persisted for 29 weeks between mid-November and early June, often at rates more than $1 billion a week.
Citi analyst George Friedlander on Friday noted more than 800 distinct funds reported outflows that week, by far the largest number in the past five weeks.
While it’s not clear how long outflows will persist, Van Eck executives aren’t concerned. “There is no disputing that long, open-end mutual funds have experienced weeks of outflows, but the registered investment adviser and separately managed account community tell us that purchases of individual bonds have increased during the past several months, likely balancing those outflows,” said Jim Colby, senior municipal strategist at Van Eck.
“This buying is occurring because of the attractiveness of the asset class, and we feel that if there is any residual or ongoing concern for municipal credit quality, investors will be drawn back to products like [the municipal income ETF fund], as well as our other ETFs, for diversification and overall quality,” he said.
Colby said while Van Eck had not specifically timed the launch to coincide with cash movements in the broad sense, closed-end funds “occupy a place of significance in the spectrum of municipal products and add elements of diversification and liquidity — features not easily obtained trading a portfolio of individual bonds.” He added that this type of product “would attract investors in any environment.”
The fund-of-funds structure tracks the S-Network index, making the fund passively managed, but gives exposure to 88 underlying municipal bond funds that are actively managed. As of June 30, the dividend yield for the index was 6.71%, compared with 6.75% the previous quarter. The index is up 5.93% year to date, but down 0.38% over the past 12 months. For the Van Eck fund, investors pay 40 basis points in fees.
The closed-end funds within the fund-of-funds structure are divided into four sectors. As of June 30, leveraged municipal fixed-income closed-end funds made up 84.4%, unleveraged muni fixed-income closed-end funds made up 8.85%, leveraged high-yield municipal fixed-income closed-end funds made up 2.83%, and unleveraged high-yield muni fixed-income closed-end funds made up 2.92%.
The index also assigns a greater weight to closed-end funds trading at discounts, potentially enhancing yield and providing the opportunity for capital appreciation.
Jan van Eck, principal at Van Eck, said funds-of-funds, such as the new Van Eck ETF fund, can pass through tax-exempt income from its holdings due to a new law that took effect last December.
“Investors have long been attracted to tax-exempt closed-end funds, which can offer attractive yields and, in some cases, sell at a discount to the underlying value of the portfolio assets,” he said.
“In the past, investors have long had to weigh these factors for themselves when investing in closed-end funds,” van Eck added. “Now, it is now possible to build a diversified, highly liquid position in multiple closed-end funds by owning shares in a single ETF.”