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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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| More |
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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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MUNICIPAL ETFS: LIMITED IMPACT |
Municipal Market Advisors, Tom Doe 4 October 2007
The first two muni ETFs began trading in September; initial capital is small but extensive marketing and media coverage should facilitate moderate asset growth in the next year. We expect ETF inflows will largely come from new, less sophisticated individual investors, but also in a more limited way from current mutual fund holders, institutional money managers (eyeing cost reductions for beta in their investment strategy), and potentially more sophisticated institutional investors (e.g. prop desks) looking to take advantage of temporary cheapness/richness in MMD and, by extension, the bond-by-bond evaluations that drive the ETFs’ NAV and market pricing.
The current muni ETFs will attempt to track their respective indices by buying and selling a sampling of the more liquid bonds included in the thousands of Cusips in those indices. The ETFs will thus have a fixed selection of bonds they (or their agent) can purchase, giving an advantage to potential sellers, who we assume will mark up bonds accordingly. However, the pricing services will also take careful note of ETF purchases, and any premiums paid may well be used to boost evaluations and thus index performance. Early buyers of ETFs are likely to see a larger (when compared with traditional mutual funds or direc ownership) share of their return generated by capital gains as opposed to interest income. This also implies that large institutions’ ability to influence the offering scale (via offerings, oss-leading trades, etc.), will be more directly felt by ETF investors. Further, 1) the ETFs are generally nationally oriented, mitigating the state benefit that is essential to most individuals; 2) despite this national focus, they will feature holdings concentrations in relatively lower-yielding CA and NY paper; and finally 3) ETF shares cannot be as easily managed to take tax advantage of gains and losses. We thus see a disadvantage in ETFs versus direct ownership; marketing plans should be focusing on less sophisticated investors that may not reap the full gains of the underlying bonds’ tax-exemption. These points may cap long-term ETF market share.
Still, because muni bond liquidity is greatest in or near the primary market, we expect the ETFs will focus their buying activities there, giving an advantage to primary market flippers and boosting the economics for both dealers and arbitrageurs.
Thomas G. Doe
Municipal Market Advisors
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| Stuff to look at |
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S&P Commentary and Newsletters: S&P
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| BondsOnline Advisor |
Income Security Recommendation January 2013 Issue.
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