Capitalizing on the increased interest in muni bond exchange traded funds (ETFs), State Street Global Advisors has filed for a new one of their own.

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

Last year, VRDO issuing volume shot up after the collapse of the auction-rate securities market. Those issues are similar to VRDOs in that they have long-term maturities, but VRDOs are considered more flexible since they allow put options as rates change.

The new fund will hold VRDOs that, on average, reset weekly. The filing notes that VRDOs are generally issued with maturities ranging from 30-40 years.

A similar fund already trading is the PowerShares VRDO Tax-Free Weekly Portfolio (PVI), which launched in November 2007. It has $333 million in assets under management. It’s up 0.4% year-to-date.

As an investment vehicle, muni ETFs have a lot going for them. Generally, fees are about half of a municipal bond fund-0.20% to 0.40%, compared to 0.50% to 0.80%. Right now, even if it’s just half a percent you’re saving, that’s a lot of money.

Muni ETFs are also more transparent than most bond funds, which only have to report what they held last quarter. They’re slightly more liquid, too. Unlike mutual funds, which can only be sold at the net asset value of the prior day’s closing price, muni ETFs can be sold at the prevailing price any time during the day.

Read the full filing here.

Tags: Bond ETFs, Municipal Bonds, New ETFs, PVI