Following a tremendously successful 2009 that saw more than $40 billion flow into fixed income ETFs, the number of bond ETFs is expected to increase significantly in 2010. In what could be the first of many new product launches, iShares introduced a line of new municipal bond, or “muni,” ETFs on Friday. Unlike existing muni bond products that are generally diversified across maturities, the iShares S&P AMT-Free Municipal Series includes six funds with a planned-end date and targeted range of maturities. The new funds include:
- iShares 2012 S&P AMT-Free Municipal Series (MUAA)
- iShares 2013 S&P AMT-Free Municipal Series (MUAB)
- iShares 2014 S&P AMT-Free Municipal Series (MUAC)
- iShares 2015 S&P AMT-Free Municipal Series (MUAD)
- iShares 2016 S&P AMT-Free Municipal Series (MUAE)
- iShares 2017 S&P AMT-Free Municipal Series (MUAF)
Each of the funds in the series is structured as an open-end fund, which holds AMT-free, investment-grade and noncallable municipal bonds until the final months of its operations, when these bonds begin to mature and the portfolio transitions to tax-exempt cash and cash-like instruments. These targeted new products have the potential to be extremely useful in a number of ways, allowing investors and advisors to fill in holes in fixed income portfolios and implement customized strategies.
Municipal bond ETFs have become increasingly popular in recent years. Currently, the ETF screener shows 20 muni bond funds with more than $6 billion in aggregate assets. The new iShares ETFs each charge an expense ratio of 0.30%, making them competitive with existing products.
Year of the Bond ETF
Considering the huge cash inflows to fixed income ETFs in the last year, the relative paucity of bond ETFs (fewer than 100 funds) is a bit surprising. The expansion of iShares’ muni bond platform could be the first of several new product launches this year. Claymore has filed for approval on a similar line of corporate bond funds, including ten ETFs with specific maturities ranging from 2011 to 2020.
While the vast majority of fixed income ETF assets are allocated to total bond market funds — BND and AGG have combined assets of more than $17 billion — increasingly innovative and targeted products are seeing some success. State Street’s convertible bond ETF (CWB) has amassed more than $200 million and PowerShares’ Build America Bond Portfolio (BAB) is quickly building assets as well. Expect several more product launches in 2010 as issuers race to establish market share in a rapidly-expanding space.
Disclosure: No positions at time of writing.