|
Page 4 of 5
Munis Tell The Tale
The municipal bond market is notoriously illiquid. As a result, ETF providers have taken different approaches to launching municipal bond ETFs, with some offering traditional in-kind creations and others offering APs the ability to do “cash creates.” In a “cash create,” an AP delivers cash to the fund in exchange for shares, rather than buying up the underlying holdings of the fund itself and delivering that basket in return for shares.
For this study, we examined the returns of 16 muni bond ETFs: three from Invesco PowerShares, four from Barclays Global Investors, four from State Street Global Advisors and five from Van Eck. Of the 16 funds, five use the traditional “in-kind” creation/redemption methodology: the four iShares funds from BGI and the Market Vectors High Yield Muni ETF (NYSE Arca: HYD) from Van Eck. The remaining 11 funds use a cash creation process, although they still rely on in-kind redemptions.
The data are unequivocal—cash creations work. The five ETFs that use in-kind creations had average premiums and discounts between 0.79% and 2.82%. They traded at a premium every day of the second quarter. For the cash creation funds, average premiums and discounts varied between just 0.015% to 0.56%. Moreover, those premiums and discounts varied, with all of the funds experiencing both premiums and discounts, and one fund – the Market Vectors Long Muni ET—trading at a discount more than 65% of the time.
|
Fund
|
Ticker
|
Avg. Premium
|
% Positive
|
Largest Premium
|
Smallest Premium
|
|
IN-KIND CREATIONS
|
|
S&P California Municipal Bond Fund
|
CMF
|
1.72%
|
100%
|
3.14%
|
0.18%
|
|
S&P National Municipal Bond Fund
|
MUB
|
0.79%
|
100%
|
1.68%
|
0.17%
|
|
S&P New York Municipal Bond Fund
|
NYF
|
1.59%
|
100%
|
5.37%
|
0.25%
|
|
S&P Short Term National Municipal Bond Fund
|
SUB
|
2.82%
|
100%
|
4.26%
|
1.91%
|
|
Market Vectors High Yield Muni
|
HYD
|
1.90%
|
100%
|
3.74%
|
0.15%
|
|
CASH CREATIONS
|
|
SPDR Barclays Capital California Municipal Bond ETF
|
CXA
|
.51%
|
90%
|
1.36%
|
-.52%
|
|
SPDR Barclays Capital Municipal Bond ETF
|
TFI
|
.11%
|
79%
|
0.52%
|
-.51%
|
|
SPDR Barclays Capital New York Municipal Bond ETF
|
INY
|
.015%
|
52%
|
4.14%
|
-3.37%
|
|
SPDR Barclays Capital Short Term Municipal Bond ETF
|
SHM
|
.09%
|
97%
|
0.39%
|
-0.06%
|
|
Market Vectors Pre-Refunded Muni
|
PRB
|
.24%
|
76%
|
1.61%
|
-0.45%
|
|
Market Vectors Short Muni
|
SMB
|
.56%
|
95%
|
1.95%
|
-.3%
|
|
Market Vectors Intermediate Muni
|
ITM
|
.38%
|
92%
|
.92%
|
-.82%
|
|
Market Vector Long Muni
|
MLN
|
-.25%
|
35%
|
1.20%
|
-2.03%
|
|
PowerShares Insured National Municipal Bond Portfolio
|
PZA
|
.19%
|
89%
|
1.23%
|
-.30%
|
|
PowerShares Insured New York Municipal Bond Portfolio
|
PZT
|
.06%
|
70%
|
0.81%
|
-.23%
|
|
PowerShares Insured California Municipal Bond Portfolio
|
PWZ
|
.15%
|
78%
|
1.18%
|
-.36%
|
The cash creation data, together with the data showing tighter premiums and discounts in more liquid markets, argue against the notion that these funds are providing price discovery. The premiums and discounts that occur in most bond ETFs are driven by the illiquidity of the underlying bonds. If you remove that illiquidity either by focusing exclusively on liquid markets or using a cash creation mechanism, the premiums and discounts largely disappear.
Note, of course, that a cash creation will not prevent a fund from trading at a discount. All of these funds do in-kind redemptions—if an AP wants out, they’re getting a pile of individual bonds in return, not a check—which means the funds are still exposed to the potential for trading at a discount.
|
RSS
