Fixed income investors may generate robust taxable equivalent yields from a municipal bond exchange traded fund that tracks a basket of closed end funds.
On the recent webcast, Attractive Value Now Seen in Municipal Bond Closed-End Funds, Paul Mazzilli, senior advisor for S-Network Global Indexes, pointed out that muni-closed end funds, or CEFs, represent over $63 billion in assets under management are the second largest segment of the U.S. CEFs market. The high popularity may be due to the assets’ enticing yields.
“An index of muni CEFs offered attractive taxable equivalent yields versus other fixed income investments,” Mazzilli said.
Specifically, the S-Network Municipal Bond Closed-End Fund Index shows a taxable-equivalent yield of about 10%. Investors interested in generating attractive yields can also take a look at the Market Vectors CEF Municipal Income ETF (NYSEArca: XMPT), which tries to reflect the same index. XMPT comes with a 5.70% 30-day SEC yield or a 9.44% taxable equivalent 30-day SEC yield for those in the highest income bracket. Moreover, XMPT provides distributions on a monthly basis for those income-oriented investors. [Muni Bond ETFs Provide Stability for a Diversified Investment Portfolios]
Unlike other muni bonds, XMPT tracks shares of municipal closed-end funds. Closed-end funds, or CEFs, are publicly traded investment companies that raise a fixed amount of capital through an initial public offering, and the fund is then structured, listed and traded like a stock on an exchange.
Like other funds, CEFs track a basket of securities. However, unlike other open-ended funds, CEFs only issue a fixed number of shares, so CEFs may experience wider premiums or discounts to its net asset value. For instance, as of August 31, the municipal closed-end funds market showed a discount to NAV of -7.36%. In contrast, U.S. CEFs showed a -3.56% historical average discount between 1990 through 2015 while muni CEFs had an average -2.16% historical average discount.
James Colby, senior municipal strategist at Van Eck Global, looked at the current market environment and argued that while we are heading toward a Federal Reserve interest rate hike, the muni debt market may have already priced in a Fed hike. Additionally, the recent sell-off may have put additional pressure on the munis market, pushing muni CEFs’ prices further below their NAVs.
Mazzilli argues that the ability to buy assets at a discount to NAV may raise yield on share prices.
CEFs are also able to utilize leverage to augment distributions, which helps the securities generate big yields, as can be seen with XMPT.
“CEF’s fixed number of shares allows effective use of leverage,” Mazzilli added.
Michael Cohick, ETF product manager at Van Eck Global, also pointed out that the muni CEF-related ETF provides diversification by assets, strategies and fund managers. Specifically, XMPT includes a group of CEFs from money managers including Nuveen Fund Advisors 42.1%, BlackRock Advisors 24.5%, Invesco Advisors 12.2%, Eaton Vance Management 4.7%, Putnam Investment Management 2.7%, Dreyfus Corp 2.0%, Western Asset Management 1.6%, Bank of New York Mellon 1.3% and Massachusetts Financial Services 1.3%.
Financial advisors who are interested in learning more about municipal bonds can listen to the webcast here on demand.