Key Muni Bond ETF Up 10% This Year Despite Default Warning

| About: iShares National (MUB)

The largest municipal bond exchange traded fund has gained about 10% this year despite a prominent analyst warning in late 2010 that muni bond investors were facing huge defaults from state and local governments.

The $2.3 billion iShares S&P National AMT-Free Municipal Bond Fund (NYSEARCA:MUB) is up 10.3% in 2011, according to investment researcher Morningstar. The fund has a 12-month yield of 3.42%, according to manager BlackRock.

“Time has just about run out on the dire predictions made late in 2010 of a debacle in the municipal bond market. While a few municipalities have captured headlines with notable fiscal woes, the amount of debt going bad in 2011 has fallen far short of the ‘hundreds of billions’ predicted,” says investment firm Lord Abbett.

“In fact, according to The Bond Buyer, as of June 30, 2011, defaults amounted to just $746 million. While this suggests a full-year total of nearly $1.5 billion, it is far less than the $8.2 billion of 2009, the $3.2 billion of 2010, and the cataclysm predicted for 2011,” according to a recent report from Lord Abbett.

Other ETFs tracking muni bonds include SPDR Barclays Capital Municipal Bond ETF (NYSEARCA:TFI) and PowerShares Insured National Municipal Bond Portfolio (NYSEARCA:PZA).

Noted analyst Meredith Whitney touched off a firestorm last year when she told “60 Minutes” that she foresaw hundreds of billions of dollars of defaults in the muni bond market.

Despite the gains in muni bond ETFs this year, investors remain wary and the yield spread of high-yield munis over investment grade is higher than the long-run average, Lord Abbett said.

“With the economy stuck in low gear, Washington stalemated over the federal budget, and Europe threatening to implode in a debt crisis, investors continue to be skittish about any investment that carries some risk,” it added. “”Credit spreads remain above their historical average, but what is strange is that defaults are down compared to historical levels. In other words, although spreads have widened, credit quality is being maintained.”

Muni bond ETFs have moved higher since Harrisburg, Pa., filed for Chapter 9 bankruptcy in October. [Muni Bond ETFs Rise]

iShares S&P National AMT-Free Municipal Bond Fund

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