Van Eck Enters Muni Market

December 06, 2007

Van Eck launches an intermediate-term muni bond ETF, as the competition continues in that space.

Van Eck Global finally launched its first muni bond exchange-traded fund (ETF) today, joining a muni bond ETF melee that has seen funds launched by the three biggest names in ETFs: Barclays Global Investors (BGI), State Street Global Advisors (SSgA) and PowerShares.

Van Eck has filed for a full family of muni bond ETFs, but decided to launch first its Market Vectors-Lehman Brothers AMT-Free Intermediate Municipal Index ETF (AMEX: ITM), which targets muni bonds with a nominal maturity of 6-17 years. The fund charges 0.20%, matching the lowest expense ratio in the muni bond ETF space.

"Municipal bond ETFs offer investors a better way to purchase municipal securities—I like to think of it as ‘more munis for the money,'" said Jan van Eck, principal at Van Eck Global. "There are compelling cost savings to consider when compared to individual bond purchases and traditional mutual fund platforms."

Van Eck's decision to target the intermediate space is not surprising, as that is one segment of the market that has not been targeted by other firms. 

BGI offers a national fund (MUB) as well as California- (CMF) and New York- (NYF) specific ETFs. PowerShares offers national (PZA), California (PWZ), New York (PZT) and VRDO (PVI) ETFs. SSgA offers national (TFI), California (CXI), New York (INY) and short-term funds (SHM).

Creations And Redemptions

The ETFs all differ significantly in their creation/redemption process, which is the process by which institutional investors "create" new shares of the ETF to sell to investors. 

The changes are explained here in depth by Rudy Aguilera. Briefly, PowerShares and SSgA use cash creations, which means that authorized participants simply deliver cash to the companies, and PowerShares and SSgA must actually go out and buy the underlying muni bonds. In contrast, BGI requires its authorized participants to buy the underlying stocks and deliver them to the company.

Van Eck may have the most innovative approach of all: authorized participants are given a daily list of permissible characteristics based on credit rating, sector, issuer, yield, etc., and are allowed to put a portfolio of securities together on their own.

Why does this matter? Because the muni bond market is notoriously illiquid. There is no central trading facility for ETFs; buying and selling them is literally a matter of calling different trading desks and making offers.

Van Eck believes (probably correctly) that its system will create the most diversified portfolio, as different authorized participants will deliver different securities. SSgA and PowerShares would argue that they can get strong institutional pricing in the cash market by using their buying heft. And BGI? It would argue that its system avoids transaction costs and allows it to gain just the portfolio it wants.

Which one is best? That question will be answered by real-time performance over the next 12+ months.

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