Colby is Portfolio Manager/Municipal Bond ETFs with more than 30 years of fixed income experience.
The discounts at which municipal bond closed-end funds are currently trading are deeper now than when they briefly plumbed fresh lows back in early August 2011. They have continued to widen inexorably since early March of this year. The weighted average discount of the underlying municipal bond closed-end funds in the Market Vectors CEF Municipal Income ETF (XMPT) was -9.95% on December 2, 2013. This is the widest it has been since XMPT’s inception on July 12, 2011.
Source: Van Eck Global. Data as of December 2, 2013. The chart does not represent XMPT's premium/discount. It represents the weighted average premium/discount of the underlying closed-end funds (CEFs) held by XMPT. There are many factors that influence the up-down movement of a closed-end fund's share price, such as the Fund yields, performance, and investor demand.
Discrepancies in net asset values (NAVs) result from changing investor sentiment. When investors are nervous, discounts appear and when the outlook is positive, those discounts narrow or turn to premiums. For investors looking to get into the market now, this recent bout of wide discounts could be an opportunity not only to pick up assets relatively cheaply compared to their NAVs, but to also potentially collect a high level of tax-free income.1
I believe that since we are coming to the end of the year, there may be investors in these funds looking to tax-loss harvest. This may, in the short term, result in discounts widening further. However, I think, generally, closed-end funds, including municipal bond closed-end funds, may offer attractive long-term income-generating opportunities.
Of course investors should not buy on the basis of discount alone. Other factors, such as risks, investment objectives, fees and expenses, also need to be fully evaluated. That said, closed-end municipal bond funds may currently be an attractive opportunity, and XMPT offers a single holding approach to investing in a portfolio diversified by strategy and manager.
1A portion of XMPT’s dividends may be subject to Federal, state, or local income taxes or may be subject to the Federal Alternative Minimum Tax (AMT).
XMPT's performance, because it is a fund-of-funds, is dependent on the performance of the Underlying Funds. XMPT is subject to the risks of the Underlying Funds’ investments, and XMPT's shareholders will indirectly bear the expenses of the Underlying Funds. In addition, at times, certain segments of the market represented by the Underlying Funds may be out of favor and underperform other segments.
The shares of a closed-end fund may trade at a discount or premium to its net asset value ("NAV"). Additionally, the securities of closed-end investment companies in which XMPT will invest may be leveraged. As a result, XMPT may be indirectly exposed to leverage through an investment in such securities. An investment in securities of closed-end investment companies that use leverage may expose XMPT to higher volatility in the market value of such securities and the possibility that XMPT's long-term returns on such securities (and, indirectly, the long-term returns of the Shares) will be diminished.
Investment in the Underlying Funds may be subject to municipal securities risk, high-yield securities risk, fixed-income securities risk, tax risk, liquidity risk, leverage risk and anti-takeover measures risk. Some of the Underlying Funds are considered non-diversified and can invest a larger proportion of its assets in a single company. As a result, they may be subject to greater risks than a diversified fund.
S-Network Municipal Bond Closed-End Fund IndexSM is calculated and maintained by S-Network Global Indexes, LLC. S-Network does not sponsor, endorse, or promote XMPT and bears no liability with respect to XMPT or any security.
IMPORTANT MUNI NATION® DISCLOSURE
Van Eck Global does not provide tax, legal or accounting advice. Investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service.
Please note this post represents the views of the author and these views may change at any time and from time to time. MUNI NATION is not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue. Non-Van Eck Global proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Global. MUNI NATION is a trademark of Van Eck Associates Corporation.
All indices listed are unmanaged indices and do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in a Fund. An index’s performance is not illustrative of a Fund’s performance. Indices are not securities in which investments can be made.
Any discussion of specific securities mentioned in the commentary is neither an offer to sell nor a solicitation to buy these securities.
Municipal bonds are subject to risks related to litigation, legislation, political change, conditions in underlying sectors or in local business communities and economies, bankruptcy or other changes in the issuer’s financial condition, and/or the discontinuance of taxes supporting the project or assets or the inability to collect revenues for the project or from the assets. Bonds and bond funds will decrease in value as interest rates rise. Additional risks include credit, interest rate, call, reinvestment, tax, market and lease obligation risk. High-yield municipal bonds are subject to greater risk of loss of income and principal than higher-rated securities, and are likely to be more sensitive to adverse economic changes or individual municipal developments than those of higher-rated securities. Municipal bonds may be less liquid than taxable bonds.
The income generated from some types of municipal bonds may be subject to state and local taxes as well as to federal taxes on capital gains and may also be subject to alternative minimum tax.
Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333. Please read the prospectus and summary prospectus carefully before investing.
Van Eck Securities Corporation, Distributor
666 Third Avenue
New York, NY 10017
Munis: Municipals in 2016
Munis: Potential Puerto Rico Defaults and Reserve Draws
Munis: Go Long for Rising Rates: Just the Facts - Part 2
Munis: Why Duration Matters
Munis: Just the Facts - Part 1
Munis: “Fed” and Fed Up?
Munis: A Better Road for Tomorrow
Munis: Value Seen in Muni Bond Closed-End Funds
Munis: Video Viewpoint with Colby
Munis: Back to Fundamentals
Munis: Stirred, Not Shaken
Munis: Summer of Discontent
Munis: No Summer Doldrums
Munis: Value in Municipal Closed-End Funds?
Munis: Halftime Perspective
Munis: Puerto Rico at a Crossroads
Munis: Infrastructure, All Talk?
Munis: 2Q'15 - No June Swoon But Finish Strong?
Munis: Talking Points on Chicago Downgrade
Munis: Update on the Commonwealth
666 Third Avenue
New York, NY 10017
This website is published in the United States for residents of specified countries. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this website. Nothing on this website should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.
Investing involves risk, including possible loss of principal. An investor should carefully consider investment objectives, risks, charges and expenses carefully before investing. This and other information can be found in the appropriate regulatory documents made available for a specified country as designated in this website.