When ETF Closures Are Good (MUAA)

Matt Tucker: When you hear about fund closures in the ETF industry, it’s not usually a positive thing.  But on August 15th, the iShares 2012 S&P AMT-Free Municipal Series ETF (MUAA) is closing, and we couldn’t be more proud.  It might seem counterintuitive, but this is one fund that was actually designed to close.

Two years ago iShares launched the Municipal Series, the first suite of ETFs designed to combine the benefits of ETFs with the features of individual municipal bonds – namely, a specified maturity date. This was a completely new type of fund structure, something not seen before in the markets.  Now that the end date of the first of these ETFs is fast approaching, it’s a chance for us to take a look at this innovative product and assess how well it did, from start to finish.

The Muni Series is a great example of a product that we created in order to solve an investor challenge.  When we launched the funds, we already had a successful municipal bond ETF in our product set, but we continuously heard requests for a version that acted more like an individual muni bond.  Investors wanted a fund that combined the specified end-date of a bond with the professional management, diversification, and daily liquidity inherent in the ETF vehicle.  Our product development team got to work on the Muni Series, and today we have six funds in the suite, with plans to add more.

Each of the six initial funds in the series holds a basket of AMT-free, investment grade, non-callable, national municipal bonds that mature between June and August in a targeted year (2012 through 2017).  Most municipalities have fiscal-year ends in the summer time and so a significant portion of the municipal market matures during this time. When each fund reaches August of its targeted closure year, it will close down and distribute substantially all of its net assets to current investors.

The iShares 2012 S&P AMT-Free Municipal Series ETF (NYSEARCA:MUAA) is the first of the series to reach its end-date.  The fund has been transitioning into short-term, tax-exempt instruments since the first of its bond holdings matured on June 1st.  On August 15th, the last of the bonds within the fund will have matured, and the ETF will close and cease trading at the end of the day. By only holding bonds that mature in a three- month window the Series funds minimize the amount of time that investors are in cash.

What does this mean for MUAA’s investors?  Holders of the fund have received a monthly distribution of income, and in August should receive a lump sum payment when the fund liquidates. At liquidation, shareholders will receive the net asset value (NAV) of the fund, which will be available after market close on our website.  They can expect to receive the amount of their proceeds in cash on or after August 21st.

As for whether this innovative product was a success, we’re happy to report that it did exactly what we designed it to do – it combined the best characteristics of a bond and a fund.  With two more of these ETFs in filing (targeting maturity dates in 2018 and 2019), we can expect to see more of these fund “closures” in the future – and continue to be pretty pleased with the results.

Written By Matthew Tucker From The iShares Blog

Matthew Tucker has spent the past 16 years focused on fixed income analytics, portfolio management and strategy. As managing director of U.S. fixed income strategy at BlackRock, Inc., and a member of the Fixed Income Portfolio Management team, Mr. Tucker leads both product strategy for ETFs and North America and Latin America iShares strategies, as well as product delivery and client sales. He previously worked with Barclays Global Investors before it merged with BlackRock, and he led the U.S. Fixed Income Investment Solutions team responsible for overseeing product strategy for active, index, enhanced index, iShares and long/short products. Mr. Tucker was also a portfolio manager and a trader in fixed income focused on U.S. government securities.

He began his career at Barra, where he supported clients using the company’s fixed income analytics. Mr. Tucker holds a bachelor of business administration degree from the University of California, Berkeley, and is a Chartered Financial Analyst charterholder.

Leave a Reply

Your email address will not be published. Required fields are marked *