Low-fee mechanisms in tax-exempt municipal debt, liquidity and transparency. What more could one ask for in an exchange traded fund (ETF)?

In the first year of their existence, ETFs with the primary goal of coupling price with the underlying muni index experienced the illiquidity of a hectic bond insurance industry, according to Dan Seymour for On Wall Street.

Muni ETFs try to mimic their indexes with holdings in a sample of bonds from the indexes. The ETFs collect coupon payments from bonds they hold, then distribute them as dividends. These ETFs are not known for their fat returns, but merely reflect the performances of their underlying indexes.

Among the many markets vying for President-elect Barack Obama’s attention is that of the muni bond. Obama’s tax plan could be conducive to the future performance of muni-bond ETFS, because of the after-tax yield.

It should be noted that the design of muni ETFs face two risks during market unrest: The price of the ETF may drift from the value of its assets or the the value of an ETF’s bond sampling may fail to reflect the overall index.

With greater diversity than individual muni bonds, muni ETFs spread the risk that potential investors would have be exposed to.

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