Closed-end funds differ from ETFs in that their trading prices may not match the value of the securities in their portfolios; this means that a CEF can trade at a discount or a premium to their assets, reports Mark Salzinger, editor of The Investor's ETF Report.
Market Vectors CEF Municipal Income (XMPT) invests in municipal bond CEFs that meet minimum requirements for assets under management and daily trading volume.
It also excludes CEFs with expense ratios above 2.0%. The remaining 80 are weighted according to their net asset value, although weightings are adjusted to favor CEFs that trade at discounts.
No single CEF can represent more than 8% of assets, and all of the CEFs that individually get an allocation larger than 5% can't collectively account for more than 45%.
Since its July 2011 inception, XMPT has generated a total return of 23.6%, versus 11.4% for iShares National AMT-Free Municipal Bond (MUB), the largest muni-bond ETF. This wide disparity in performance demonstrates the impact leverage and discount prices can have on returns.
However, leverage and discounts cut both ways: leverage amplifies losses, and discounts can widen. When municipal bonds struggled in 2013, MUB lost only 3.4%, while the market price of XMPT slid 12.5%.
XMPT has a high expense ratio of 1.65%. However, it does generate considerably more income than other municipal bond ETFs, recently 5.9% (or 8.2% tax-equivalent yield for an investor in the 28% tax bracket).
However, while MUB has an investment-grade portfolio with a moderate duration (a measure of interest rate sensitivity), XMPT is higher risk, with lower credit quality (the lowest level of investment-grade, on average) and more interest rate sensitivity.
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