A rule change implemented last month by the by the Municipal Securities Rulemaking Board (MSRB) is beneficial for some municipal bond exchange traded funds, according to some market observers.
The SPDR Nuveen Bloomberg Barclays Municipal Bond ETF (NYSEArca: TFI) and the SPDR Nuveen Barclays Capital Short Term Municipal Bond ETF (NYSEArca: SHM) are among the municipal bond ETFs seen benefiting from the MSRB rule change.
The rule change “requires brokers, dealers and municipal securities dealers to now disclose mark-ups and mark-downs on certain principal transactions of municipal bonds to retail customers,” said State Street Global Advisors (SSgA) in a recent note.
The new rule is aimed at increasing transparency for buyers of individual municipal bonds, but it could also lead to higher transaction costs, potentially luring investors to ETFs with favorable fees. The $2.70 billion TFI charges just 0.23% per year, or $23 on a $10,000 investment. SHM’s annual fee is just 0.20%.
Inside The New Rule
“With the new rule, pricing details must be disclosed in confirmation statements, along with a hyperlink to MSRB’s Electronic Municipal Market Access website, which contains trade data for the specific bond traded,” said SSgA. “Notably, transactions in new issue offerings and municipal fund securities will be exempt from dissemination of mark-ups and mark-downs. This includes retail client trades of municipal bond ETFs. This exemption also applies to ETF/fund manager transactions in municipal bonds.”
SSgA data indicate retail investors are subject to significantly higher transaction costs in individual investment-grade municipal bonds compared to what they pay to get access to ETFs such as SHM and TFI.
“While retail investors’ trading costs for individual bonds has declined over the last few years, those costs remain, on average, significantly higher than ETF spreads on the secondary market,” said SSgA. “More efficient secondary markets with lower transaction costs via the ETF wrapper can lead to lower overall costs for retail municipal bond investors, while still offering the tax benefits of holding individual municipal bonds.”
SHM has an option adjusted duration of 2.76 years while the same metric on TFI is 6.61 years.
For more information on the munis market, visit our municipal bonds category.
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.