| Matt Hougan (IndexUniverse) submits: Barclays Global Investors has filed papers with the Securities and Exchange Commission for the first municipal bond exchange-traded fund, filling a notable hole in the ETF industry's product lineup.
The new iShares S&P National Municipal Bond Fund will track the S&P National Municipal Bond Index, a comprehensive index of state and local municipal bonds with investment grade ratings of BBB- or better. There is no word yet on the expense ratio, listing site or ticker for the ETF.
The muni market is huge and hugely varied, with an estimated $2.3 trillion in outstanding bonds spread among 2+ million individual offerings. The size and breadth of the muni bond market has been the chief stumbling block to any ETF launch. The new index tackles that problem by using a number of features?including market value weighting and a minimum market cap of $100 million?designed to boost the underlying liquidity of the components. The fund also has some limited discretion to use derivatives and other instruments to help track the index, and will use a sampling methodology that should help liquidity as well.
Creations and redemptions will be done with a representative portfolio of bonds, so that authorized participants aren’t saddled with the task of tracking down a few thousand individuals (and sometimes illiquid) muni bonds.
As with all muni bond funds, the chief advantage of this new iShare will be that dividend payouts should be exempt from federal taxes. For many investors in a taxable account, the tax-equivalent yield of a muni bond investment exceeds that of a comparable taxable bond payout.
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