• Muni Nation

    December 2013

    by James Colby, Portfolio Manager

    Colby is a Senior Municipal Strategist with more than 30 years of fixed income experience, responsible for Market Vectors municipal bond investments.


    Black Friday for Muni Closed-End Funds...Don't Miss the Discounts

    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.

    Deep Discounts in Muni Closed-End Funds 

    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.