• Muni Nation

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

    Jim Colby, Portfolio Manager
    December 11, 2013

    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 VanEck 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: VanEck. 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.




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    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. 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.

    Diversification does not assure a profit or protect against loss.

    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 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.

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