James Colby is Van Eck Global's senior municipal fixed-income strategist. His 28 years of experience in the industry also include serving as a muni director at Lord, Abbett; John Hancock Funds; and Evergreen Asset Management, among others.

On Friday, IndexUniverse.com's Murray Coleman caught up with Colby to discuss recent developments in muni bond markets and the role exchange-traded funds are playing.

IU: Are bond ETFs helping to set prices and improve liquidity in municipal markets?

Colby: Bond ETFs have helped to maintain, if not improve, liquidity. Muni ETFs, as a group, are only a year and a half old. They were thrust into the marketplace at a period we'll all look back upon as a seminal point in the fortunes of Wall Street.

We were simultaneously hit with subprime woes and corresponding auction-rate securities problems. The demise of the single-purpose bond insurer also took place at this same time. With all of that as a backdrop, muni ETFs certainly came to market at a time of tremendous strain and tension in our capital markets.

IU: What have ETFs proven so far?

Colby: For one, they've definitely proven an ability to attract investors. That fact is supported by the asset growth we've seen in muni ETFs despite such an incredibly difficult market environment. We've gone from zero assets under management to over $2 billion in 18 months. I would call that a victory.

IU: Have muni ETFs shown any shortcomings?

Colby: What's yet to be proven is the full promise of what ETFs can deliver. They can definitely deliver improved pricing and price discovery as well as greater transparency. But it hasn't happened yet in the context of being able to transact in a reasonably efficient and orderly market.

IU: Once markets return to more normal circumstances, do you see muni ETFs helping investors in other ways?

Colby: Yes, I do. It's important to note that the muni marketplace is about $2.7 trillion in U.S. market value. At the same time, there's no exchange for munis—they're still traded as an over-the-counter asset. So transparency in terms of price discovery remains as murky as ever. With ETFs, however, a financial model has been created to price municipal bond portfolios every 15 seconds of every day that an exchange is open.

That point has sort of been lost in the fog of the turmoil in the marketplace. But the model that is in place for pricing muni ETFs—as imperfect as some may view it—has indeed established a basis for specialists to make markets.

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