(Feb 22, 2012) Morningstar ETF Analyst, Timothry Strauts, told investors to sell IShares S&P National AMT-Free Municipal Bond (MUB). Investors looking for a similar ETF, might move their money into SPDR Nuveen Barclays Capital Municipal Bond (TFI).
These two funds are remarkable according to Strauts. They share the following in common:
- They both invest in high-quality Municipal Bonds.
- The bonds they hold have similar maturities and yields.
- The ETFs charge almost identical fees.
There is only one thing they don’t have in common, return. The MUB has gained 4.9% this year while the performance of TFI has only been 2.19%.
What’s the difference?
Did MUB somehow have a better pool of bonds?
No. The performance difference is that one sells at a premium to the value of its holdings and the other does not. MUB sells at a 3-4% premium to the value of the bonds it holds. Essentially, MUB and TFI are extremely similar products, but MUB is more expensive.
First, I want applaud Mr. Strauts for making a clear cut recommendation. I am sure that iShares is one of Morningstar’s biggest clients. To suggest clients sell one of their ETFs takes courage.
Secondly, while I think Strauts is correct in his analysis, I think he is missing the bigger point: the supply of high quality Municipal is not equal to demand. As a result of bond insurers going bankrupt or losing their AAA rating, the number of high investment grade municipal bonds has shrunk. That, combined with Municipalities issuing less new debt, has created a situation where investors are bidding up the price of munis and their related assets, such as Municipal Bond ETFs.