Van Eck, the New York City-based ETF issuer known for its lineup of sector specific ETFs in the commodity space, filled with the SEC to expand its footprint in the bond arena with a proposal for a Municipal Bond Closed-End Fund ETF. The product would be the 39th fund from the company and it would mark the ninth bond fund from the firm. While details on the fund’s expense ratio and ticker symbol were not released, we have highlighted some of the key details from this brand new filing below:
This proposed fund will track as closely as possible, before fees and expenses, the price and yield performance of the Market Vectors Municipal Bond Closed-End Fund Index. This benchmark consists of U.S.-listed closed-end funds and these underlying funds invest in municipal bonds issued by states or local governments or agencies the income of which is exempt from U.S. federal income tax. The municipal securities which each underlying fund may purchase include general obligation bonds and limited obligation bonds (or revenue bonds), including industrial development bonds issued pursuant to former federal tax law. General obligation bonds are obligations involving the credit of an issuer possessing taxing power and are payable from such issuer’s general revenues and not from any particular source. Limited obligation bonds are payable only from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise or other specific revenue source. In addition, an underlying fund may invest in lease obligations as well, these take the form of a lease or an installment purchase contract issued by public authorities to acquire a wide variety of equipment and facilities [see Wide World Of Muni Bond ETFs].
It is also important to note that the fund will use a sampling strategy in order to replicate the index. This means that tracking error could become an issue if the fund managers do not select the right securities to match the overall index’s performance. Additionally, the fund could face a strange issue if it ever reaches a size that dominates the market. Since the fund intends to invest in closed-end funds, which by definition only dole out a certain number of shares, this proposed ETF could reach a point where it is unable to purchase the required amount of underlying securities thereby turning into a closed-end fund as well. While this is an issue that is extremely unlikely to happen, especially given the vast size of the muni bond market, it is a phenomenon that investors should be aware of before buying closed-end fund ETFs.
Van Eck: Muni Bond Powerhouse
If approved, this latest fund would help Van Eck further increase its offering in the municipal bond space, a market that Van Eck has made great inroads into over the past few years. The company currently has one high yield muni bond fund, the Market Vectors High-Yield Muni Bond Fund (HYD), and it has four investment grade muni funds as well. Together, these products have amassed close to $700 million suggesting that a decent amount of investor interest exists for funds in this space [Muni Bond Investing: More Than MUB].
The launch would also mark just the second Closed-End Fund to hit the ETF world. The first was the PowerShares Closed-End Fund ETF (PCEF) which invests in high yield fixed income securities. The fund has received a warm welcome from investors, amassing close to $220 million in assets despite charging one of the higher expense ratios in the business at 1.62%. Should this proposed fund from Van Eck ever hit the market and pay out yields somewhere in the neighborhood of what PCEF does, it is very likely that Van Eck will continue to make gains in market share in the increasingly large muni bond fund space [see all the ETFs in the National Munis ETFdb Category].
[For more ETF news sign up for our free ETF newsletter.]
Disclosure: No positions at time of writing.