Municipal Bond Exchange Traded Fund (ETF) Landscape. Published: Feb 27, 2014 Report Scope: US

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1 Municipal Bond Exchange Traded Fund (ETF) Landscape Published: Feb 27, 2014 Report Scope: US 1

2 Key Highlights This report provides a brief overview of municipal bond ETFs, using holdings and classifications data from First Bridge s ETF database. There are 34 ETFs in the US that provide targeted Municipal bond exposure, with an aggregate of $11.67B in net assets * All of these ETFs (with one exception) have net expense ratios in the bps range, providing low cost access to the asset class. 80% of these assets are in ETFs that provide either broad national exposure or targeted exposure to specific maturity ranges. 97% of these ETF assets are index linked, with Barclays and S&P Dow Jones being the leading index providers in this space. The pace of new launches in this asset class has slowed since 2010, with the newer ETFs being more specialized and gathering a relatively smaller share of assets. An analysis of underlying holdings shows that ETFs with similar investment objectives may provide varying regional exposure. About Us First Bridge provides ETF data and analytics to reputed institutional clients. Our ETF data sets include daily ETF holdings, global ETF product classifications and risk metrics. Our customers include asset managers, financial software platforms and research firms that use ETF data as a critical input into their systems or workflow. support@firstbridgedata.com Phone: (650) Web: *Assets as of Jan 31,

3 Municipal Bond ETF Landscape Overview There are 34 ETFs in the US that provide targeted Municipal bond exposure, with an aggregate of $11.67B in net assets *. They range from those that provide broad market exposure to others that are focused on segments of the market, such as specific geographies, maturity ranges and credit quality. All of these ETFs (with one exception) have net expense ratios in the bps range, providing investors with low cost access to the asset class. Most, but not all, of these ETFs track an underlying index. In subsequent pages we look at which ETFs are index based vs. active. Net Expense Ratios Type of Municipal Bond Exposure ETF Tickers (Range in basis points) Broad Market (National) TFI, MUB, PZA Targeted Maturity / Duration SHM, SMB, ITM, MLN, SUB, MUAC, MUAE, MUAD, MUAF, MUAG, MUAH, MUNI, SMMU, GMMB High Yield HYD, SHYD, HYMB Build America Bonds BAB, BABS, BABZ California Municipals CXA, CMF, PWZ Specialty / Other VRD, PRB, PVI, RVNU, XMPT New York Municipals INY, NYF, PZT * Source: First Bridge Data and individual ETF Sponsors; Product list and expenses ratios as of Feb 25, 2014; Asset total as of Jan 31, 2014 An updated list of all ETFs listed in the US can be downloaded at: 3

4 Muni Bond ETFs: Assets by Type of Exposure Almost 40% of ETF assets in this category are in products that provide broad based exposure to municipal bonds nationally. Another 40% is in ETFs that target specific maturity ranges such as short (<5 years), intermediate (6-17 years) and long (>17 years) or specific calendar years. Some municipal bond ETFs provide access to very specific types of bonds, such as Pre- refunded municipal bonds, VRDO securities and Build America bonds. Municipal Bond ETF Assets by Type (Total: $11.67B) Build America Bonds 6% Targeted Maturity 39% Broad Market 39% Specialty 2% New York 2% High Yield 9% California 3% 4

5 Muni Bond ETFs: Index vs. Active Market Share 97% of Municipal Bond ETF assets are index- linked. These ETFs attempt to replicate the performance of their underlying indices and are not actively managed. This is not surprising given that the ETF industry has its roots in index based investing. Only 3 of the 34 ETFs are actively managed, two of which are sponsored by PIMCO. It is likely that we will see more actively managed municipal bond ETFs in the future. Barclays and S&P Dow Jones Indices are the index providers with the largest market share in the underlying indices, with 42.7% and 42.2% of total assets respectively. Index Provider Market Share Barclays, 42.7% ACTIVE 2.6% INDEX LINKED 97.4% S&P DJ Indices, 42.2% BofA ML, 10.7% Others, 1.8% 5

6 Muni Bond ETFs: Timeline of Product Launches The broad exposure municipal bond ETFs launched in 2007 continue to have a majority of the assets in this category. The pace of new launches in this asset class has slowed since 2010, with the newer ETFs being more specialized and gathering a relatively smaller share of assets. (Note: The chart only shows ETFs that are still trading and does not include closed ETFs) 6

7 Analysis of Holdings: Disparity by State of Issuer An analysis based on the First Bridge ETF Holdings Database shows that even ETFs that have similar investment objectives may actually provide varying regional exposure. For example, MUB (ishares) and TFI (SPDR) both aim to give investors access to the investment- grade, national municipal bond market. However MUB has more exposure to issuers from CA and NY relative to TFI. In MUB, issuers from CA account for 23% of the weight and together with NY, the 2 states account for 42% of the market value held. By contrast, in TFI, issuers from NY have the largest share (22%) and issuers are more geographically diversified. 7

8 Muni Bond ETFs: Historical Risk / Return We have plotted the annualized return and standard deviation for 3 large municipal ETFs (MUB, TFI CMF) based on 5- year historical returns, along with the corresponding data for US equities (SPY) and broad based US bonds (AGG). As we can see, MUB and TFI have had a higher return (and correspondingly higher risk) than the aggregate bond ETF (AGG). The chart also plots the risk/return for US equities (SPY) as context. It is important to note that since we have used a 5- year time frame, the data starts in early 2009 when equity markets were bottoming out after the decline in 2008 and the current equity bull market started.. We can also see that the narrower municipal bond ETF (CMF) has had both higher returns and risk than the corresponding broad based municipal ETFs over the same period. 25% 20% Annualized Return 15% 10% 5% MUB CMF AGG SPY TFI 0% 0% 5% 10% 15% 20% 25% Annualized Standard DeviaEon 8

9 Appendix: List of Municipal Bond ETFs ETF list as of 2/26/14; Assets as of 1/31/14. An updated product list is available at: 9

10 Appendix: List of Municipal Bond ETFs (contd). ETF list as of 2/26/14; Assets as of 1/31/14. An updated product list is available at: 10

11 Appendix: List of Municipal Bond ETFs (contd). ETF list as of 2/26/14; Assets as of 1/31/14. An updated product list is available at: 11

12 List of Municipal Bond ETFs (contd). ETF list as of 2/26/14; Assets as of 1/31/14. An updated product list is available at: 12

13 More First Bridge ETF Resources ETF Book - ETF Investment Strategies (McGraw- Hill): A Terrific Read ETF Editor, Barron s A Must Read Editor, Journal of Investment Management US ETF Product List: ETF Daily Holdings: daily- holdings- and- product- list/ First Bridge also maintains a dataset of all globally listed ETFs. For more information, support@firstbridgedata.com 13

14 Important Disclaimers First Bridge Data LLC does not intend this guide to provide investment advice, and the information provided in this guide is not and should not be considered investment advice. First Bridge Data LLC shall not be liable for any actions or decisions made based on the information provided in this document, and the reader assumes all risk associated with any investment decision made based on information contained in this document. First Bridge Data LLC is not a registered investment advisor or broker, and does not recommend specific securities, funds, or investment strategies, nor does it advocate the purchase or sale of any individual investment vehicle. Discussion or references to specific securities or investment products in this book should not be considered endorsements or offers to buy or sell those products. The past performance of a mutual fund or exchange- traded fund (ETF), security, or investment strategy cannot guarantee its future performance. First Bridge Data LLC has no obligation to update this document or to correct any errors or omissions that might be contained in this document. First Bridge Data LLC disclaims all warranties of any kind, expressed or implied, and hereby disclaim and negate all other warranties, including without limitation implied warranties or conditions of merchantability, fitness for a particular purpose, or non- infringement of intellectual property or other violation of rights. First Bridge Data LLC does not guarantee the completeness, accuracy, or timeliness of any data in this document, including any data sourced through third- party content providers. Neither First Bridge Data LLC nor its employees, third- party content providers, nor any person through whom the First Bridge Data LLC makes this document available, shall be liable for any direct, indirect, incidental, punitive, special, or consequential damages (including, without limitation, attorneys fees), whether in an action of contract, negligence, or other tortious action, that result from the use of this book. Neither First Bridge Data LLC nor its content providers shall be liable for any punitive, special, indirect, or consequential damages arising from or relating to the foregoing, whether in contract or tort or otherwise, even if First Bridge Data LLC has been advised of the possibility of such damages. 14