ETFs gain popularity in muni market, but are they a good fit?

Exchange-traded funds that invest in municipal bonds are gaining in popularity, but some industry watchers believe that mutual funds are a better option. The ETF structure just isn't a good fit for the muni market, they said. It can lead to pricing irregularities and doesn't lend itself well to active management — which some observers believe is particularly well-suited to the muni market. When it comes to the muni bond market “there is no real advantage to the ETF structure,” said Marvin Appel, chief executive of Appel Asset Management Corp. and vice president of Signalert Corp. To¬gether, the two registered investment advisory firms manage more than $300 million. Despite such concerns, ETF pro¬viders are forging ahead with new muni offerings. They note that such ETFs have much lower expenses than muni mutual funds and that while some muni mutual funds outperform their benchmark, the great majority do not. GROWING LIST Invesco PowerShares Capital Management LLC expects to launch a muni ETF that will invest at least 80% of its total assets in taxable municipal securities eligible to participate in the Build America Bonds program created under the American Recovery and Reinvestment Act of 2009. It will join a growing list of ETFs that are finding different ways to play in the muni market. State Street Global Advisors late last month launched the SDPR Standard & Poor's VRDO Municipal Bond ETF (VRD), designed to provide in¬vestors with access to municipal variable-rate demand obligations. To read the full version of this story, please see the Oct. 6 issue of InvestmentNews