iShares, the largest ETF issuer in the world, is continually looking to expand its already huge portfolio of over 300 products. The issuer has already launched roughly two dozen products this year, including two municipal bond ETFs – iBonds Sep 2020 AMT-Free Muni Bond ETF (IBMI) and 2019 AMT-Free Muni Term ETF (MUAH).

Continuing with the trend, the issuer proposes to add another product in the municipal bond ETF space to expand its existing product portfolio (read: iShares Launches 2018 Muni Bond ETF).

Though some key information, including expense ratios and holdings, were not released, we have highlighted some of the major points for the newly proposed fund – iShares Short Maturity Municipal Bond ETF below.

iShares Short Maturity Municipal Bond ETF in Focus

As per the SEC filing, the proposed actively managed ETF doesn’t track any particular index and seeks to maximize tax-free current income by investing in U.S. dollar-denominated investment-grade short-term fixed- and floating-rate municipal securities.

The fund will primararily invest in securities such as municipal bonds, municipal notes and variable rate demand obligations, as well as money market instruments with remaining maturities of five years or less.

The interest income on these bonds should be exempt from U.S. federal income taxes and the federal alternative minimum tax (“AMT”). However, the fund may invest up to one-fifth of its assets in municipal securities that pay interest which is subject to the AMT.

Also, the fund is expected to have an effective duration of less than 1.2 years, while in terms of credit quality, the product looks to focus on BBB- or higher rated bonds from Fitch and S&P or Baa3 or higher from Moody’s (see: all the Municipal Bonds ETFs here).

How does it fit in a portfolio?

Municipal bonds are an excellent choice for investors seeking a steady stream of tax free income. Usually the interest income from munis is exempt from federal tax and may also avoid state taxes, making it especially attractive for investors in the high tax bracket looking to reduce their tax liability.

Moreover, with increasing U.S. taxes, demand for municipal bonds is likely to increase. Also, munis are a safer bet as compared to corporate bonds (read: Worried About Taxes? Check 3 Muni Bond ETFs).

Can it succeed?

There are quite a number of choices in the short-term municipal bond space with SPDR Nuveen Barclays Capital Short Term Municipal Bond ETF (SHM) topping the list in terms of AUM size. The fund manages an asset base of $2.3 billion and also provides ample liquidity.

SHM tracks the Barclays Managed Money Municipal Short Term Index to provide exposure to a basket of 548 investment grade securities. The average maturity for the fund stands at 3.2 years, while duration is 2.96 years. The fund has a 30-day SEC yield of 0.52% and charges 20 basis points as expense.

However, the next popular product in the space is iShares’ very own Short Term National AMT-Free Muni Bond ETF (SUB) which has an asset base of $903 million and is passively managed. Like the recently filed product, SUB also provides exposure to investment-grade U.S. municipal bonds with remaining maturities between one month and five years (read: 4 New iShares ETFs Hit the Market).

The fund tracks the S&P Short Term National AMT-Free Municipal Bond Index and has a 30 Day Sec Yield of 0.25%. SUB charges 0.25% as expenses

Apart from the above two, Market Vectors Short Municipal Index ETF (SMB) is another product focusing on short-term investment-grade municipal bonds. Though the proposed ETF if launched will likely face competition from the above passively managed ETFs, it is also expected to compete with PIMCO Short Term Municipal Bond Exchange-Traded Fund (SMMU) – the only actively managed ETF in the space.

However, SMMU seems to be less popular and liquid with an asset base of $76.3 million and an average trading volume of less than 10,000 shares. The fund charges 35 basis points as expenses.

Given this, it is difficult to say how iShares’ new product, if launched, will perform. However, if the product does succeed in generating returns in excess of the passively managed products and also in comparison to SMMU, then it might gain investor interest and in turn gather a sizable asset base.

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Read the analyst report on IBMI

Read the analyst report on MUAH

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Read the analyst report on SMMU


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