As the US recovery starts to gain momentum amid an improving labor market, the buzz of a possible lift-off for the Federal Funds Rate (FFR) by the second-half of this year is getting louder.
Needless to say, the short end of the yield curve is drawing top dollars as worried fixed income investors are rushing in to protect their capital before the Fed makes its move. Also, the tax-free status of muni bonds makes them doubly more attractive, particularly for individuals that belong to the high tax bracket.
To take advantage of renewed investor interest in the fixed income space, iShares, the world’s largest issuer of exchange traded funds, recently launched its first actively-managed munis ETF. The newly rolled out iShares Short Maturity Municipal Bond ETF (MEAR) targets investment-grade municipal debt with maturities less than five years.
Under normal circumstances, the portfolio will have an effective duration of 1.2 years or less, indicating low interest rate risk for the fund.
Munis were one of the best performing segments within the FI asset class last year despite the Fed failing to make any move on the interest rate front. BlackRock has nearly 300 ETFs on offer while MEAR is the firm’s 7th actively managed fund.
Fifteen states are represented in MEAR with New Jersey topping the chart with 15.1 percent fund allocation. Rhode Island (6.45 percent), Michigan (6.11 percent), New York (6.08 percent) and Florida (6.06 percent) are the remaining four states among the top five holdings. Cash and derivatives constituted 33.00 percent of total assets. The weighted average coupon of MEAR stood at 2.96 percent while effective duration was measured at 1.41 years.
MEAR’s only competitor in the actively managed munis’ space is the PIMCO Short Term Municipal Bond ETF (SMMU) with an expense ratio of 35 basis points. Launched in 2010, SMMU has little over $55 million in assets while MEAR has already raked-in more than $37 million since its launch on March 3.
MEAR has an annual expense ratio of 25 basis points.
Disclosure: No holdings
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