San Francisco-based iShares, the market leader in ETFs, is enjoying its dominance across different asset classes, sectors and industries. Managed by BlackRock Group, the issuer continues to hit the target-date-maturity municipal bond market with the launch of a new product that aims at giving investors new options for fixed income exposure.
iShares expanded its existing municipal funds line-up to seven with the launch of new ETF- 2018 S&P AMT-Free Municipal Series .
MUAG in Focus
The new ETF looks to track S&P AMT-Free Municipal Series 2018 Index. The index measures the performance of the U.S. municipal bonds maturing in 2018 and comprises 1400 securities. The bonds must have a minimum par amount of at least $2 million.
The fund will generally invest in municipal bonds that are issued by state and local municipalities. The interest on these bonds should be exempted from the U.S. federal income tax and the federal AMT.
In terms of credit quality, the product looks to focus on BBB- or higher rated bonds from Fitch and S&P or Baa3 or higher from Moody’s. This targeted portfolio will cost investors 30 bps in fees per year (read: Target Date Bond ETFs: Best or Worst Fixed Income Funds?).
The fund will mature or terminate on or about Aug 31, 2018. The index has an effective duration of 4.80 years and average maturity of 5.35 years.
How does it fit in a portfolio?
The product is an interesting choice for investors who wish to avoid stock market volatility while at the same time ensure a steady stream of cash flow from their portfolio. It will create laddering possibilities for investors seeking to retain short-term exposure to the muni market.
Municipal bond ETFs will continue to attract investors this year as they seek tax shelters in the rising tax environment. The tax-free coupon makes the muni funds attractive at present, especially with recent tax law changes.
Further, the product can also be a great pick for investors seeking to match assets with liabilities, in order to have capital ready for a big purchase a few years from now (read: Time to Exit Junk Bonds ETFs?).
While the fund is generally cheaper than its ‘regular’ bond counterparts in terms of expense ratios, due to their lower portfolio rebalancing and turnover, it usually incurs wide bid-ask spreads due to the low volumes triggered by inactive trading. This can thereby increasing the total cost of investing, although this depends on securities bought and the size of the fund in question.
Can it succeed?
There are a couple of choices in the muni bonds ETF space targeting short-term maturities.
The most popular in the space is its own S&P National AMT-Free Muni Bond ETF (MUB - ETF report) , which has roughly $3.6 billion in AUM. The ETF uses sampling strategy, by holding about 2,333 securities out of the index’s more than 9,000 holdings.
The weighted average maturity of the holdings is 5.91 years while the effective duration is 6.23 years. The ETF charges a low expense ratio of 25 bps and currently pays a 30-days SEC yield of 2.93% (tax-equivalent distribution yield of 5.44%).
The next popular product in the space is the SPDR Nuveen Barclays Short Term Municipal Bond ETF (SHM - ETF report) , which is a bit inexpensive at 20 bps a year. Holding 439 securities, the fund has an average maturity of 3.15 years and average duration of 2.90 years.
In terms of yield, it pays a lower 0.39% in 30-days SEC yield (0.60% in tax-equivalent distribution yield). The ETF has an impressive $1.9 billion in its asset base (see more ETFs in the Zacks ETF Center).
Apart from these funds, the new ETF also faces some 2018 competition from the target date corporate bond ETF by Guggenheim.
The BulletShares 2018 Corporate Bond ETF (BSCI - ETF report) focuses on investment-grade corporate bonds with effective maturities in the year 2018. With AUM of $60.2 million, the product has an effective maturity of 5.30 years and effective duration of 4.55 years. It charges 0.24% in fees per year and yields 1.75% in 30-days SEC (read: Comprehensive Guide to U.S. Junk Bond ETF Investing).
Given this, it is hard to say how the new iShares targeted muni bond ETF will do in terms of investor interest. But if it can manage to generate a decent yield and stable returns, it won’t be too hard to see big inflows for this solid addition to iShares’ bond lineup in the increasingly popular muni ETF space.
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