When you hear about fund closures in the ETF industry, it’s not usually a positive thing. But on August 15th, the iShares 2012 S&P AMT-Free Municipal Series ETF (MUAA) is closing, and we couldn’t be more proud. It might seem counterintuitive, but this is one fund that was actually designed to close.
Two years ago iShares launched the Municipal Series, the first suite of ETFs designed to combine the benefits of ETFs with the features of individual municipal bonds – namely, a specified maturity date. This was a completely new type of fund structure, something not seen before in the markets. Now that the end date of the first of these ETFs is fast approaching, it’s a chance for us to take a look at this innovative product and assess how well it did, from start to finish.
The Muni Series is a great example of a product that we created in order to solve an investor challenge. When we launched the funds, we already had a successful municipal bond ETF in our product set, but we continuously heard requests for a version that acted more like an individual muni bond. Investors wanted a fund that combined the specified end-date of a bond with the professional management, diversification, and daily liquidity inherent in the ETF vehicle. Our product development team got to work on the Muni Series, and today we have six funds in the suite, with plans to add more.
Each of the six initial funds in the series holds a basket of AMT-free, investment grade, non-callable, national municipal bonds that mature between June and August in a targeted year (2012 through 2017). Most municipalities have fiscal-year ends in the summer time and so a significant portion of the municipal market matures during this time. When each fund reaches August of its targeted closure year, it will close down and distribute substantially all of its net assets to current investors.
The iShares 2012 S&P AMT-Free Municipal Series ETF (MUAA) is the first of the series to reach its end-date. The fund has been transitioning into short-term, tax-exempt instruments since the first of its bond holdings matured on June 1st. On August 15th, the last of the bonds within the fund will have matured, and the ETF will close and cease trading at the end of the day. By only holding bonds that mature in a three- month window the Series funds minimize the amount of time that investors are in cash.
What does this mean for MUAA’s investors? Holders of the fund have received a monthly distribution of income, and in August should receive a lump sum payment when the fund liquidates. At liquidation, shareholders will receive the net asset value (NAV) of the fund, which will be available after market close on our website. They can expect to receive the amount of their proceeds in cash on or after August 21st.
As for whether this innovative product was a success, we’re happy to report that it did exactly what we designed it to do – it combined the best characteristics of a bond and a fund. With two more of these ETFs in filing (targeting maturity dates in 2018 and 2019), we can expect to see more of these fund “closures” in the future – and continue to be pretty pleased with the results.
Disclaimer: Bonds and bond funds will decrease in value as interest rates rise. A portion of the Fund’s income may be subject to federal or state income taxes or the alternative minimum tax. Capital gains, if any, are subject to capital gains tax.
Narrowly focused investments typically exhibit higher volatility and are subject to greater geographic or asset class risk. The Fund is subject to credit risk, which refers to the possibility that the debt issuers will not be able to make principal and interest payments. Shares of the Fund trade at market price, which may be greater or less than net asset value.
An investment in the Fund(s) is not guaranteed, and an investor may experience losses, including near or at the termination date. In the final months of the Fund’s operation, as the bonds it holds mature, its portfolio will transition to cash and cash-like instruments. Following the Fund’s termination date, the Fund will distribute substantially all of its net assets, after deduction of any liabilities, to then-current investors without further notice and will no longer be listed or traded. The Funds do not seek to return any predetermined amount.
During the final three months prior to the Fund’s planned termination date, its yield will generally tend to move toward prevailing tax-exempt money market rates, and may be lower than the yields of the bonds previously held by the Fund and lower than prevailing yields for bonds in the market.
The rate of Fund distribution payments may adversely affect the tax characterization of an investor’s returns from an investment in the Fund relative to a direct investment in municipal bonds. If the amount an investor receives as liquidation proceeds upon the Fund’s termination is higher or lower than the investor’s cost basis, the investor may experience a gain or loss for tax purposes.