PowerShares has recently launched an exchange traded fund (ETF) designed after a tax-free money market fund, but the low-risk part seems to have gotten left out. VRDO Tax-Free Weekly Portfolio (PVI) tracks the performance of a poll of variable rate demand obligations, or VRDOs, which are long term, fixed-rate municipal bonds that act like short-term floating rate notes, explains Lawrence Carrel for TheStreet.
VRDOs act like money market instruments because investors can demand repayment with 7 days’ notice. Interest rates on the notes reset each week depending on the money market. They are popular because they yield slightly more than other short-term instruments and are perceived as safe.
This is where the rule of thumb changes, however: These are not typical times for broader credit markets or municipal bonds.The current subprime mortgage mess has spilled over into the $2.5 trillion muni bond market. The bond insurers in the VRDOs are being called on to cover the missed principal payments and the interest that’s adding up. The problem is that those same companies also insure securities backed by subprime mortgages.
The timing is off for this ETF because the big bond insurers are a cause for concern.
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