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’ 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.

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’ 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.