With market volatility still a concern and Treasury yields relatively low, State Street Global Advisors has filed to launch a new municipal bond exchange-traded fund.

The SPDR S&P Municipal VRDO ETF will track an index of variable rate demand obligations. Those are debt issues by states, local governments and other agencies that pay interest exempt from federal income taxes.

VRDO issuing volume skyrocketed last year after the collapse of the auction-rate securities market. Those types of fixed-income issues are similar to VRDOs since they each have long-term maturities but reset frequently, giving both types of securities short-term interest rate features. But VRDOs are considered more flexible since they allow put options as rates change.

The VRDOs tracked by the ETF's underlying Standard & Poor's index will have its yield reset periodically according to rates quoted by the Securities Industry and Financial Markets Association.

As explained in the filing, VRDOs typically are issued with maturities of 30-40 years.

"However, they are considered short-term instruments because they include a put feature that coincides with the periodic yield reset," the filing noted.

The new ETF will hold VRDOs that on average reset weekly, according to the filing. "VRDOs are put back to a bank or other entity that serves as a liquidity provider ... rather than the issuer," the documents stated. "The remarketing agent tries to resell those VRDOs or, failing that, holds them in its own inventory. In addition, VRDOs commonly hold a credit enhancement, such as a letter of credit from the remarketing agent or a bank, and/or bond insurance."

No expense ratio was provided in the filing, which is available here.

The ETF will use a sampling methodology common among bond index funds. "The quantity of holdings in the fund will be based on a number of factors, including asset size of the fund," said the filing.

It will go head-to-head with the existing PowerShares VRDO Tax-Free Weekly Portfolio (NYSE Arca: PVI), which launched in November 2007 and currently has $333 million in assets under management. PVI delivered a 3.3% return in 2009, putting it near the top of the returns tables for the year.