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Despite Narrowing Of Relative Valuation, One National Muni Fund Is Still Better Than The Other


  • An arbitrage trade between the national muni funds was proposed.
  • The trade moved in our favor, although in this case borrow fees were too much to overcome.
  • On a standalone basis, one of the funds is still better than the other.

Author's note: This article was released early to members of the Cambridge Income Laboratory.

A municipal [muni] bond is a debt security issued by a state, municipality or county to fund its capital expenditures, such as the building of highways, bridges or schools. Muni bonds are exempt from federal taxes and from most state and local taxes, making them especially attractive to people in high income tax brackets. This arbitrage trade deals with two national muni closed-end funds [CEFs].

  • Short: DWS Municipal Income Trust (NYSE:KTF): 6.21% yield, +8.04% premium, +2.00 z-score, 36.37% leverage, 1.40% expense ratio.
  • Long: Pioneer Municipal High Income Advantage Trust (NYSE:MAV): 5.10% yield, -2.20, -4.94% discount, 33.05% leverage, 1.21% expense ratio.

A divergence has opened up between the CEFs. Both funds are national muni funds, though it should be noted that MAV contains a significant amount of non-investment grade and non-rated debt (40.0%), whereas the portfolio of KTF is 97% investment grade. KTF has a 4 star rating from Morningstar while MAV is rated 5 stars, though I do not put much stock into those ratings.

Over the past 1 year, KTF has a price return of +6.66%, beating MAV (-13.17%) by some 20 percentage points.

However, much of this has been due to KTF's expanding premium:

(Source: CEFConnect, KTF)

In fact, KTF's current premium of +8.04% has only been reached a few times over the past 18 years, and you have to go back to 1998 (!) before we see premia in excess of 10%.

(Source: CEFConnect, KTF)

In contrast, the premium/discount of MAV has fallen onto hard times, falling from nearly 12% last year to its present value of -4.94%.

(Source: CEFConnect, MAV)

Notably, MAV was trading at significant premia until recently. Only in 2008 did its discount exceed -10%.

(Source: CEFConnect, MAV)


This article was written by

Stanford Chemist profile picture
CEF/ETF income and arbitrage strategies, 8%+ portfolio yields

CEF/ETF Income Laboratory is a premium newsletter on Seeking Alpha that is focused on researching profitable income and arbitrage ideas with closed-end funds (CEFs) and exchange-traded funds (ETFs). We manage model safe and reliable 8%-yielding fund portfolios that have beaten the market in order to make income investing easy for you. Check us out to see why one subscriber calls us a "one-stop shop for CEF research.”

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The CEF/ETF Income Laboratory is a top-ranked newsletter service that boasts a community of over 1000 serious income investors dedicated to sharing the best CEF and ETF ideas and strategies.

Our team includes:

1) Stanford Chemist: I am a scientific researcher by training who has taken up a passionate interest in investing. I provide fresh, agenda-free insight and analysis that you won't find on Wall Street! My ultimate goal is to provide analysis, research and evidence-based ways of generating profitable investing outcomes with CEFs and ETFs. My guiding philosophy is to help teach members not "what to think", but "how to think".

2) Nick Ackerman: Nick is a former Financial Advisor and has previously qualified for holding Series 7 and Series 66 licenses. These licenses also specifically qualified him for the role of Registered Investment Adviser (RIA), i.e., he was registered as a fiduciary and could manage assets for a fee and give advice. Since then he has continued with his passion for investing through writing for Seeking Alpha, providing his knowledge, opinions, and insights of the investing world. His specific focus is on closed-end funds as an attractive way to achieve income as well as general financial planning strategies towards achieving one’s long term financial goals.

3) Juan de la Hoz: Juan has previously worked as a fixed income trader, financial analyst, operations analyst, and economics professor in Canada and Colombia. He has hands-on experience analyzing, trading, and negotiating fixed-income securities, including bonds, money markets, and interbank trade financing, across markets and currencies. He is the "ETF Expert" of the CEF/ETF Income Laboratory, and enjoys researching strategies for income investors to increase their returns while lowering risk.

4) Dividend Seeker: Dividend Seeker began investing, as well as his career in Financial Services, in 2008, at the height of the market crash. This experience gave him a lot of perspective in a short period of time, and has helped shape his investment strategy today. He follows the markets passionately, investing mostly in sector ETFs, fixed-income CEFs, gold, and municipal bonds. He has worked in the Insurance industry in Funds Management, helping to direct conservative investments for claims reserves. After a few years, he moved in to the Banking industry, where he worked as a junior equity and currency analyst. Most recently, he took on an Audit role, supervising BSA/AML Compliance teams for one of the largest banks in the world. He has both a Bachelors and MBA in Finance. He is the "Macro Expert" of the CEF/ETF Income Laboratory.

Analyst’s Disclosure: I am/we are long MAV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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