Van Eck Global has used municipal bond exchange-traded funds to make a name for itself in the tax-exempt investment arena, and the firm sees more growth ahead.
"Prior to 2007, I don't think anyone recognized Van Eck Global as an expert in the delivery of tax-exempt products, but we're doing that now," said Jim Colby, the senior municipal strategist for fixed-income at the New York asset management company. "We've certainly asserted and positioned ourselves to be very competitive in that universe."
Companies began to introduce muni bond ETFs two years ago, and Van Eck has started five in its Market Vectors brand. Collectively, the funds have $350 million of assets under management.
"We're certainly expecting that these funds are going to grow substantially larger than they are now," Colby said. He declined to state asset goals but alluded to a possibility of doubling assets next year. "If we double the size of our funds from here to there, we'd say, 'OK.' "
That does not seem unreasonable, given that, in a flight to safety, muni bond investors increased their ETF assets 200% in the 12 months through Nov. 30, to $5.75 billion, according to Morningstar Inc.
Van Eck has the eighth-largest muni bond ETF in the industry, its $120 million-asset high-yield fund. This, however, is a fraction of the size of the leaders. BlackRock's iShares S&P National AMT-Free Muni BondETF had $1.58 billion of assets to top the list, and the PowerShares VRDO Tax-Free Weekly Fund had $1.14 billion, according to Morningstar.
Muni bond ETFs have caught on largely because they are an easy way to get in and out of the market, according to Scott Burns, the director of ETF analysis at Morningstar. "I think people are seeing that the biggest problem with investing in muni bonds is liquidity," he said. "Once you buy it, in a way you're stuck with it."
Colby said that much of the demand for muni bond ETFs is coming from financial advisers who use them within their allocation models. This type of ETF is attractive in part, he said, because more than 60,000 muni bond issuers exist in the United States and analyzing and understanding many bonds is difficult.
"With an ETF, they have a diversified portfolio of investments that are managed to an index," Colby said, "so they are not likely to get the highest yield or to dramatically underperform."
Burns said that one popular use for muni bond ETFs is as part of a bond-laddering tool. The funds offer muni bond-like returns, their interest is tax advantaged — just as muni bonds' interest is — and they can be cashed out quickly, he said.
Van Eck, which had $10 billion of ETF assets under management in all at Nov. 30, is something of a niche player in the muni bond ETF world. Its first three products were built to capture the short, intermediate and long parts of the yield curve.
In addition to its high-yield fund, the company also offers the Pre-Refunded Municipal Index ETF, which combines the credit quality of Treasury securities with the tax advantage of munis. The company's five muni bond ETFs cover the credit spectrum from high-yield to high quality, Colby said.
Such unusual ETFs are characteristic of Van Eck, said Ronald Rowland, the president of Capital Cities Asset Management in Austin. Van Eck's equity ETFs offer access to nations like Vietnam, he said.
Colby said that demand for municipal bonds has recovered dramatically, which has helped fuel the growth of the ETFs that invest in them. "A year ago, the muni marketplace had nearly fallen through the crevice," he said. "It's had a remarkable rally and recovery in regard to performance and assets."
Colby expects the municipal bond rally to continue, but said a repeat of this year's performance is unimaginable. The past year "is going to be looked upon as one of the more dramatic moments in fixed-income."