ETF providers zero in on municipal-bond market

An exchange-traded fund launched last week offers investors access to hard-to-reach segments of the municipal-bond market. Another has been proposed. Last week, State Street Global Advisors launched the SDPR Standard & Poor's VRDO Municipal Bond ETF (VRD), which is designed to provide investors with access to muni variable-rate demand obligations. VRDOs, which are often issued with maturities of up to 30 or 40 years, are considered short-term instruments because they have a one-day or seven-day put feature that coincides with the timing of the daily or weekly yield reset. The SSgA ETF has an expense ratio of 0.2%. Invesco PowerShares Capital Management LLC launched a similar ETF — the PowerShares VRDO Tax-Free Weekly Portfolio — at the end of 2007. It has an expense ratio of 0.25%. The VRDO ETFs can make sense for investors, but the investor really has to understand how they work, said Scott Burns, director of ETF analysis at Morningstar Inc. “In a world where [interest] rates might rise, they are good,” he said. “But when rates fall, they may not be such a good idea.” The Invesco PowerShares Build America Bond Portfolio plans to offer investors another way to play in the muni-bond space. It would normally invest at least 80% of its total assets in taxable muni securities eligible to participate in the Build America Bonds program created under the American Recovery and Reinvestment Act of 2009, according to the ETF's prospectus, which was filed Sept. 15. Under the program, muni-bond issuers get to collect a 35% annual rebate from the federal government on the interest paid on the bonds. That rebate allows various government entities to offer more attractive yields. “PowerShares has always had a history of finding these hard-to-reach niche areas,” Mr. Burns said. “I think this just provides a liquid vehicle for investors to participate in a bond structure that's pretty hard to get access to.” The proposed PowerShares ETF's prospectus didn't include an expense ratio.