Fund Watch
Market Vectors Intermediate Muni Index
This exchange-traded fund has delivered solid gains, despite a shaky economy.
By Nellie S. Huang, Senior Associate Editor, Kiplinger's Personal Finance
November 2011
The earth shifted under the market for municipal bonds last December, after a prominent analyst predicted that a slew of state and local governments would default on their IOUs. But munis didn’t crumble. Year-to-date through September 8, the average intermediate-maturity tax-free bond returned 7.9%.
SEE ALSO: Our Special Report on Exchange-Traded Funds
Market Vectors Intermediate Muni Index ETF (symbol ITM) has done even better, gaining 9.4%. But the benchmark it tracks, the clumsily named Barclays Capital AMT-Free Intermediate Continuous Municipal Index, returned 10.0%. What gives? The discrepancy lies in the way the ETF portfolio is created. The Barclays index holds some 13,000 issues; the ETF, at last report, held just 387. Van Eck Associates, which runs the ETF, uses proprietary software to pick a sampling of bonds designed to mimic the index. “We’re not doing an exact replication,” says co-manager James Colby III.
Instead of using the usual five- to ten-year maturity range that most intermediate muni funds stick to, Colby stretches his to a six- to 16-year window. The reason: He says investors can capture a greater percentage— 90% or better—of the “available yield” in municipal bonds by extending maturities by a few years. The fund’s average duration, a measure of interest-rate sensitivity, is 6.4 years, compared with 5.3 years for its peer group, according to Morningstar. The figure suggests that the ETF would lose 6.4% if interest rates rose one percentage point.
Permission to post your comment is assumed when you submit it. The name you provide will be used to identify your post, and NOT your e-mail address. We reserve the right to excerpt or edit any posted comments for clarity, appropriateness, civility, and relevance to the topic.
View our full privacy policy