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NEW YORK, Sept 10 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
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
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