by Matthew Posner - The Bond Buyer 07/06/07
The first municipal bond exchange-traded fund will be up and running by the end of this year as Barclays Global Investors iShares Tuesday filed a prospectus with the Securities and Exchange Commission outlining the new investment product.
“This is a bit of a red herring, meaning this shows our intention to create the fund and now we just have to wait a certain amount of time before we can launch it,” said Noel Archer, principal and head of development for domestic iShare products. “Our goal here is to put out the building blocks to allow investors to take advantage of all parts of the yield curve, and the municipal curve has not been tapped into yet. Pending regulatory issues — and they can take longer than you expect — we see this fund in the market by the end of this year.”
The iShares S&P National Municipal Bond Fund will track the not-yet-released Standard & Poor’s national municipal bond index. The objective of the fund will be to copy the performance of the index by investing in the same, or similar, credits that are part of the index. This index will only include investment-grade bonds with no lower than a BBB-minus rating from Standard & Poor’s, Baa3 from Moody’s Investors Service, and BBB-minus from Fitch Ratings.
The index also is restricted to bonds with a minimum of $100 million in par outstanding and it will not include tobacco settlement-backed bonds. The maturity and call date on the bonds included can be no shorter than one year. Maureen Maitland of Standard & Poor’s said the index is currently in development but will be released shortly.
One-hundred thousand shares of the EFT will be created and priced at the net asset value of the underlying assets in the fund. It is not clear yet where the shares will be traded, but the document mentions several U.S. exchanges, such as the New York Stock Exchange, American Stock Exchange, and the Chicago Board Options Exchange. New shares can be created and issued on an ongoing basis.
“Essentially, investors are looking for cost-effective, transparent exposure, so when you think about the municipal markets at a whole, a lot of times it is not very liquid and there are a lot of costs to building a portfolio of individual securities,” Archer said. “This all goes away when you wrap it up in an iShare because it does it all for you. You get transparency of your holdings, you get diversification, low cost and the ability to change objectives easily by simply selling your shares.”
Chris Mosellen and Lee Sterne, currently portfolio managers with BGI, will manage the fund. iShares is the brand name of Barclays’ ETF product line. It currently has 16 fixed-income ETFs in the marketplace that manage about $25 billion.
Archer said this fund will be exempt from federal taxes, and said that down the road the company will be looking at state-specific products as well.
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