Should an exchange traded fund (ETF) be created to beat the benchmark index or outperform it? Municipal bond ETF providers are butting heads over the polemical issue of whether ETFs should offer an investor pure exposure or provide investment know how.
As it stands, the majority of providers such as BlackRock, State Street Global Advisors, Van Eck Global and Invesco Powershares believe passive is the way to go. Those landing on the active side of things include providers such as PIMCO, Grail Advisors and most recently Eaton Vance, writes Dan Seymour for The Bond Buyer. [Why Bond ETFs Still Have Appeal.]
By the end of January, there were 27 muni ETFs available with $6.19 billion in assets. Prior to 2009, all muni ETFs were passively managed – the ETFs bought bonds in a target index and tried to provide a 95% correlation with the index.
Bond holdings in passive muni ETFs only represent a small portion of the overall bond index. Passive muni ETF portfolio managers aim to reflect the benchmark index through “representative sampling.” The portfolio managers would break down the index into categories like credit risk, duration and maturity, and weight the fund with bonds that recreates the aggregate risk characteristics of the benchmark. [The Causes of Tracking Error.]