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Sunday, June 30th, 2013

~ 13 0630 zMUB

The iShares S&P National AMT-Free Municipal Bond Fund (MUB) is the largest muni ETF around, therefore it gets the most attention.  Given recent events, it’s time to revisit it here again too.

The top panel of the chart shows the total return of MUB over the last four years.  It’s easy to see the decline in late 2010, principally related to Meredith Whitney’s warnings about municipal bonds.  The returns recovered, only to flatten out last year and dive in response to the fixed income rout that started in early May, before bouncing back somewhat the last few days.

In the middle you see the premium (when it’s above the red line) or discount of the market price for MUB versus its net asset value.  At bottom is the number of shares outstanding for the fund.

Notice the relationship between the three series.  Without putting too fine a point on it, observe the general pattern:  While MUB is doing better and money is coming in (new shares being created), the ETF tends to trade at a premium.  When it is under pressure, it’s at a discount.  In particular, notice the bigger moves up and down in returns and some of the remarkable premiums and discounts (always in a way that hurts the investor).

According to IndexUniverse, the creation and redemption process is “what keeps ETF share prices trading in line with the fund’s underlying net asset value.”  The promise of ETFs is that that mechanism will keep the price close to the NAV so that investors don’t pay extra on the way in and get less on the way out.  The reality is different than the promise.

These are end-of-day numbers, so there are certainly some more egregious numbers intraday.  ETF investors (in this and other vehicles) don’t realize that they are regularly getting mubbed.  (Chart:  Bloomberg terminal.)

hot off the press

Every few weeks I write a newsletter with links to readings that might be of interest to investment trustees and others that act as fiduciaries.  The latest Prudent Fiduciary Digest featured the active/passive debate, governance and risk management considerations, FOG (fact-deficient obfuscating generalities), and great life lessons from Byron Wien.

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