It’s actually pretty cool. The new funds, which launched in January, fall under a new family of iShares ETFs called the Muni Series. Basically, these funds are structured to track an index of AMT-free, investment grade and non-callable municipal bonds. What sets these funds apart is that they all have an end-date, upon which the fund will distribute substantially all of its net assets. [5 ETFs Offering Inflation Protection.]
The iShares Muni Series trade on an exchange just like other ETFs and generate monthly income on top of an end-date distribution. Although the yield to maturity is comparable to a portfolio of municipal bonds of similar maturity and credit quality, the monthly and final payouts are not always predictable. But in order to preserve the YTM, the fund dynamically adjusts its end-date distribution in line with its monthly payouts. So as monthly payouts fall, the end-date distribution will rise to compensate and vice-versa. [The Case for Emerging Market Bond ETFs.]
The main factor influencing monthly yields is that as investors enter the fund, it will purchase new bonds that may have different yields and prices, thereby affecting the overall profile of the fund.
A fund will start to transition into maturity beginning in June of the end-date year. At this point, the fund will begin to shift its assets into cash and cash-equivalent vehicles as the bonds within the fund start to mature. By the end of August, the fund will have completely transitioned into cash and distributed its net assets to investors. [Muni Bond ETFs Scrutinized.]
Approximately six months before a fund matures, a new fund will open in the consecutive year of the longest-dated fund. Currently, the longest-dated fund is at 2017.
Monthly distributions will be treated as federal tax-exempt income while the end-date distribution will be treated as a sale for tax purposes. Thus, investors may realize capital gains or loss from the investment. [Bond ETFs Hot in Q1, But Look Out.]
These funds are particularly useful for meeting fixed-income needs, building ladders and targeting specific points on the municipal bond curve.
- iShares 2012 S&P AMT-Free Municipal Series (NYAR: MUAA)
- iShares 2013 S&P AMT-Free Municipal Series (NYAR: MUAB)
- iShares 2014 S&P AMT-Free Municipal Series (NYAR: MUAC)
- iShares 2015 S&P AMT-Free Municipal Series (NYAR: MUAD)
- iShares 2016 S&P AMT-Free Municipal Series (NYAR: MUAE)
- iShares 2017 S&P AMT-Free Municipal Series (NYAR: MUAF)
Sumin Kim 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.