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High-Yield Municipal Bond Investing Comes to ETFs

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“Very specifically, this is the first of its kind–as an ETF, this is a unique animal,” says Jim Colby, senior municipal strategist and portfolio manager with Van Eck Global, in describing the New York-based asset manager’s Market Vectors High-Yield Municipal Index ETF (HYD). Launched in mid-February, HYD is the nation’s first ETF to focus on the high-yield segment of the municipal bond market, according to Van Eck. Listed on NYSE Arca, HYD uses no leverage and offers portfolio and price transparency. “Because munis have been difficult for individuals to access, ETFs really simplify the process and bring it to the individual investor in a way to make them more comfortable,” Colby adds. At 0.35%, HYD’s total net expenses are also significantly lower than those of most high-yield muni mutual and closed-end funds, according to Van Eck.

HYD seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Barclays Capital Municipal Custom High Yield Composite Index. The index has a 25% weighting in investment-grade triple-B bonds and a 75% weighting in below-investment grade bonds. In addition, 75% of the index is in bonds issued as part of transactions of at least $100 million in size. It also provides exposure to a selection of high-yield muni sectors, including health care, industrial development, special tax, and airports, which had weightings of 21.4%, 14.7%, 13.5% and 13.5%, respectively, as of December 31, 2008.

HYD is the fifth municipal bond ETF in the Market Vectors lineup, which also includes the Short Municipal Index ETF, Intermediate Municipal Index ETF, and Long Municipal Index ETF, as well as Pre-Refunded Municipal Index ETF, which was introduced in early February.

“We have options available to investors that are ultraconservative to relatively conservative, and they can target certain parts of the yield curve with this family,” Colby says. “This enables anybody taking a look at the family to say ‘If I were building a strategy around muni bonds, I have a clear opportunity to earn a bit more yield’ because the investment grade ETFs that we have are positioned slightly different than competitor ETFs in the marketplace.”