UPDATE 1-Barclays launches first U.S. muni bond ETF
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NEW YORK, Sept 10 (Reuters) - Barclays Global Investors on Monday launched the first municipal bond exchange-traded fund that trades on the American Stock Exchange.
The iShares S&P National Municipal Bond Fund will track a liquid, institutional-quality municipal bond index and its annual expense ratio is currently 0.25 percent, BGI said in a statement.
The product gives investors an opportunity to place low-cost bets on the $2.4 trillion U.S. municipal bond market without actually owning individual bonds directly.
Municipal bonds trade in the over-the-counter market rather than an organized exchange and can only be bought through a broker. A typical cost to a retail investor is 2 percent of a purchase price.
Exchange-traded funds are like mutual funds that track indexes, but trade on exchanges like stocks.
"Investors have been looking for a simple and cost-effective method of gaining exposure to the municipal market, which is traditionally a less liquid and expensive marketplace, especially for those building a portfolio of individual issues," Noel Archard, head of U.S. iShares Product Development, said in the statement.
"The iShares S&P National Municipal Bond Fund looks to solve those problems," he added.
Market participants have been talking about muni ETFs ever since the first fixed-income ETF was introduced in the United States in 2002, but the tax-exempt market presented some challenges to ETF providers.
Unlike stocks that are easily valued, it was difficult to price municipal bonds until 2005 when real-time reporting and trading was introduced.
"We feel like the municipal bond iShares will further increase transparency as investors will now be able to see a basket of municipal bonds trading on the exchange throughout the day, something that did not exist before," said Matthew Tucker, head of fixed income investment solutions at BGI.
The fund will track a new Standard & Poor's index that will include tax-exempt bonds sold by state and local governments that have a minimum rating of "BBB-minus" and a size of at least $50 million.
Tucker said BGI also plans to launch New York and California muni ETFs. BGI is part of Barclays Plc (BARC.L).
Interest income on the new ETF will be exempt from federal income taxes and could also be exempt from state income taxes, just like interest on regular municipal bonds. The fund will seek to avoid capital gains distributions.
Similar funds have been proposed by State Street Global Advisors, PowerShares Capital Management and Van Eck.
It is too early to say whether ETFs will become a dominant force in the municipal bond market, Tucker said.
Barclays' first muni ETF was funded with $288 million. Tucker said it was hard to estimate what size it would reach, but its other 16 fixed-income ETFs have approximately $28 billion in assets under management or more than $1.5 billion in each fund.