The ride for all sorts of long-duration bonds and bond ETFs turned bumpy in mid 2013 after the former Fed Chairman Ben Bernanke announced the central bank would begin to taper its long-running quantitative easing program towards the end of the year.
Poor fiscal health management in many municipalities made the situation worse for Munis.The situation for the almost $3.7 trillion municipal market, however, took a turn for the better this year on rising tax concerns, muted performance of equity markets and improving health of many municipal bond issuers.
First Trust, the Wheaton, Illinois-based eighth-largest US provider of exchange-traded funds, unveiled an actively managed municipal bond ETF to tap into this opportunity. The First Trust Managed Municipal ETF (FMB) seeks to generate current income that is exempt from regular federal income taxes and attempts to offer long-term capital appreciation by investing in a portfolio of primary investment grade municipal bonds while offering daily liquidity and total transparency of prices.
Historically, returns of municipal bonds have exhibited low correlation to other asset classes. Additionally, risk-adjusted returns of tax-exempt Munis have been attractive compared with other asset classes on taxable equivalent yield basis. These factors, combined with a low default rate compared to corporate bonds in each rating class, should make this asset class appealing to investors inclined to build a well-diversified portfolio.
Under normal market conditions, FMB seeks to achieve its investment objective by investing at least 80 percent of its net assets in municipal debt securities. However, unlike index-tracking passive Muni ETFs that simply rely on third party rating agencies, FMB uses a disciplined approach through a combination of fundamental research and quantitative analysis that focuses on the issuer’s ability to meet its financial obligations.
The fund currently holds 47 bonds in its portfolio and is well diversified geographically, comprising of securities from issuers across the country. First Trust believes it is prudent to position the fund along the intermediate portion of the yield curve given the potential for higher interest rates as the economy firms up going forward.
The fund charges 65 basis points in fees annually.
Disclosure: No holdings