Well that honeymoon was short.
Barclays Global Investor's first mover advantage in the municipal bond exchange-trade fund [ETF] space lasted less than 24 hours.
The iShares S&P National Municipal Bond Fund (NYSEARCA:MUB) debuted on Monday, September 10, and traded a respectable 14,700 shares before the closing bell. But shortly after the 4pm close, State Street Global Advisors (SSgA) crashed the party with word that it would launch a muni bond ETF of its own. SSgA said the SPDR Lehman Municipal Bond ETF (NYSEARCA:TFI) will begin trading on the American Stock Exchange "on or about September 13." That gives BGI less than a week to build up momentum in its fund; it also means that the battle for muni bond assets will be fought on the merits -- returns, yields, credit ratings, expense ratios and liquidity - rather than on first-mover advantage alone.
It should be interesting.
Off the top, TFI challenges MUB with a lower expense ratio, charging just 0.20% against 0.25% for the iShares fund. That's a fairly significant advantage in a market where after-costs yield is the key focal point of many investors.
There are, however, very important differences between the funds in other areas as well. The two underlying indexes, for instance, are quite different: the BGI fund includes bonds with ratings as low as BBB-, while the SSgA fund will focus on higher quality credits with an average rating of AA1/AAA. However, part of the BGI fund is insured, and S&P credit analysts recently assigned it an AA- rating, bringing it closer in-line with SSgA's offering.
The funds also differ in their creation/redemption strategies, as explained by Rudy Aguilera here. Briefly put, the BGI fund uses an in-kind creation/redemption strategy, while SSgA's fund operates primarily in cash. There continues to be debate on the merits of each approach.
Ultimately, the key will be how well these funds trade and what they pay for after-costs yield. SSgA's lower expense ratio gives it a leg up, but BGI has a strong offering as well, and has supported that offering by seeding the fund with nearly $300 million ... an unheard of sum in today's ETF market, and one that sent a signal to investors that it will support the fund with adequate liquidity. All eyes will now be on SSgA as it rolls its fund out to investors.
Next up? PowerShares and Van Eck ... the muni bond story gets more interesting every day.
Written by Matthew Hougan