| Bonds Online |
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| 5/10/2013Market Performance |
| Municipal Bonds |
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
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0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| Income Equities: |
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| Preferred Stocks |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
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1,276.26 |
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| REITs |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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| MLPs |
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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See Data
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Muni ETFs: Less Pricing Risk Than Mutual Funds With Illiquid Assets |
Seeking Alpha - Feb. 13, 2011 - by GridLex
Investors in muni ETFs may be scratching their heads in light of the recent beatings that they have taken, wondering how comparable mutual funds are relatively better off. The answer may not be in the superior investment skills of the mutual funds, but rather, could be because of stale pricing of the underlying illiquid bond holdings of the mutual funds that do not reflect market pricing.
Dan Seymour from the Bond Buyer (the leading publication on Municipal Finance) recently wrote about illiquidity in the muni bond marker, explaining how that impacts pricing on ETFs, and why ETFs move before indices.
A key excerpt from the article is given here:
“Muni ETFs definitely seem to be precursors reflecting expectations of the muni market, especially in the fourth quarter,” said Phil Fang, who manages the municipal ETFs at Invesco PowerShares. “We believe that muni ETFs can reflect the expectations of the muni market ahead of it.” In that sense, the more dramatic sell-off of municipal ETFs may have been presaging further weakness in municipal bonds, as well as manifesting weakness in the bond market that wasn’t showing up in indexes. The muni market includes more than 60,000 issuers and at least 1.2 million CUSIP numbers. Munis are considered less liquid than Treasury or corporate bonds. Some muni bonds never trade, and most trade infrequently. Indexes designed to reflect values in the municipal bond market rely on pricing services, such as Interactive Data, to evaluate bonds that aren’t trading. Investors don’t necessarily always believe these pricing services: it might be that a bond that would otherwise be trading at a lower price is quoted by a pricing service at a higher price simply because nobody is trading it, so there’s no discovery of the lower price.
So, if the benchmarks lag the general ETF market in coming to a market based pricing, could mutual funds also exhibit a similar lag in catching up to market based pricing? This question becomes all the more important when you look at the methodology of pricing services such as Interactive Data. These pricing services use Option Adjusted Spread (OAS) valuation methodologies to value these illiquid bonds but the primary inputs is the benchmark curve which is then overlaid to include credit spreads, duration, callable options and other factors. If you believe that the benchmarks indices exhibit stale pricing, then it would follow that the bond valuation that is driven of these benchmarks would also lag the ETFs.
But, how big an issue is this pricing risk for mutual funds compared to ETFs?
We (GridLex) analyze large data sets to provide investment, trading and risk management insights to clients. As part of our municipal bond and fund analytics service, we monitor the underlying portfolio holdings of more than 200+ muni mutual funds and ETFs that control more than 80% of mutual fund and ETF assets. One element of our liquidity analysis examined trading data for the underlying muni fund holdings and ETFs for a given period and determines what percentage of the underlying bond holdings have not been traded in the past 90 days. For example, if a fund held a bond – ABC- and if that bond was not traded in the past 90 days, it was considered illiquid.
Funds with a high percentage of assets that have not been actively traded would use non-market based pricing for a significant portion of their assets and as a result would run the highest risk of having stale pricing. The 90 day inactive trading is a conservative baseline, since most ETFs and funds would need to use non-market based pricing sometimes even if the bonds have not traded for a day. In the current volatile period, even short durations of non-market based pricing impact overall returns.
To examine the effects of illiquid assets on stale pricing and returns, we picked two mutual funds with the most illiquid assets in their peer group – Nuveen Intermediate Tax Free Fund (FMBIX , FAMBX , FMBCX) and Thornburg Intermediate Municipal Fund (THIMX, THMCX) – and compared them to two of the largest ETFs with a similar profile – S&P National AMT-Free Municipal Bond Fund (MUB) and SPDR® Nuveen Barclays Capital Municipal Bond ETF (TFI).
Although, our entire analytics were across a much larger universe, for illustrative purposes, the smaller cohort group was selected based on funds with similar duration, national scope and investment profiles. We examined the illiquid assets, returns, effective duration, returns and SEC yields for this group and have shared the data in the below table.
For the complete article.
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Income Security Recommendation January 2013 Issue.
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