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.]
PIMCO, like other actively managed ETF providers, believes that a portfolio manager should devote his or her time to research and beat the market. PIMCO launched its first actively managed ETF last year, the PIMCO Intermediate Municipal Bond Strategy Fund (NYSEArca: MUNI). The fund has a published benchmark index but only uses it as a comparison. Grail Advisors shortly followed with its own intermediate fund, the Grail McDonnell Intermediate Municipal Bond ETF (NYSEArca: GMMB). Most recently, Eaton Vance has registered to launch a series of actively managed funds. [Actively Managed ETFs: The Trend for 2010?]
Actively managed muni ETFs provide investment expertise of an established manager at a lower cost than mutual funds and greater transparency. For instance, Grail’s muni ETF has an expense ratio of 0.35% while the average mutual fund fee is 0.9%. [5 Reasons ETFs Are Better Than Mutual Funds.]
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.