Market Vectors: Black Friday Discounts on Muni Bonds

ETF Trends

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. Apart from that time in 2011, this is the widest it has been since XMPT’s inception on July 12, 2011.

View photo

.
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.

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, not at least 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.

View Comments (0)