Everyone is talking about the new municipal-bond exchange traded funds (ETFs). Barclays was the first to release one, followed immediately by State Street. The competition will become even more fierce when Van Eck and PowerShares launch their versions of municipal-bond ETFs. Let’s stop and take a quick review of how these ETFs differ:

Barclays
Barclays’ iShares S&P National Municipal Bond Fund (MUB) launched with $300 million, which is a lot more liquidity than some other ETFs that have launched with $5 million, says Rudy Aguilera for Index Universe. The management fee for MUB is 25 basis points; however, in small print is a contractual agreement that says a portion of the management fee is waived through June 30, 2008. If the agreement is not renewed, the management fee will increase by five basis points. This also would be the first ETF to possibly increase its fees after a launch rather than lower them.

StateStreet
State Street might have deliberately waited until Barclays launched its muni-bond ETF so that they could offer a less expensive alternative one, proposes Matt Hougan for Index Universe. The expense ratio for State Street’s SPDR Lehman Municipal Bond ETF (TFI) is 0.20% versus MUB’s 0.25%.

PowerShares
PowerShares’ municipal-bond ETFs are set to launch in early October. They include:

• PowerShares Insured Municipal Bond ETF
• PowerShares National Municipal Bond ETF
• PowerShares California Municipal ETF
• PowerShares New York ETF

All of the PowerShares ETFs are based on Merrill Lynch bond indexes that were designed with ETFs in mind, so there’s less work involved. In comparison, the competitors’ ETFs are based off indexes that are already in existence, so the fund managers will have to pick and choose bonds that they feel will best represent the index, says John Southard, managing director of research for PowerShares.

All of the ETFs are insured except the National Municipal Bond ETF. Insured ETFs give investors holdings with a triple-A rating. The PowerShares municipal bond ETFs also differ from the others in that the indexes they track have a built-in five-year call protection. A call protection protects investors from having their bonds called. If a bond is called away from them it would eliminate a reliable income flow. In addition, the PowerShares muni-bond ETFs typically have a longer maturity of 20 or more years, so in general, investors will receive a little bit better of a yield compared to the others, Southland says.

Van Eck
Unfortunately, Adam Phillips, Director of Van Eck Global could not comment on the Van Eck’s municipal-bond ETFs because they are still pending approval by the SEC. The municipal-bond ETFs in registration that will track various Lehman indexes are:

• Market Vectors-Lehman Brothers Intermediate Municipal ETF
• Market Vectors-Lehman Brothers Long Municipal ETF
• Market Vectors-Lehman Brothers 1-5 Year Municipal ETF
• Market Vectors-Lehman Brothers High Yield Municipal ETF
• Market Vectors-Lehman Brothers California Municipal ETF
• Market Vectors-Lehman Brothers New York Municipal ETF

Regardless of whether municipal-bond ETFs are right for your portfolio, the main point is that when ETF providers compete, investors can win.

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