Vanguard yanks filings for new muni bond offerings

In light of the extreme volatility in the municipal bond market, The Vanguard Group Inc. has withdrawn the documents it filed with the Securities and Exchange Commission to launch three muni bond index funds and three exchange-traded funds, as first reported on InvestmentNews.com.
JAN 21, 2011
In light of the extreme volatility in the municipal bond market, The Vanguard Group Inc. has withdrawn the documents it filed with the Securities and Exchange Commission to launch three muni bond index funds and three exchange-traded funds, as first reported on InvestmentNews .com. The fund company originally filed in June to open three funds based on Standard & Poor's muni bond benchmarks. The firm is holding off, however, because of the recent volatility in the muni bond market, said Chris Alwine, head of the muni bond group at Vanguard, which has $83 billion in assets. One of the most challenging periods for index funds to track their indexes is when they first launch, because the amount of assets is still small, he said. When the fund gets bigger, the tracking improves, he said. But with the recent volatility in the muni market, gaining assets would be difficult, Mr. Alwine said. “With everything going on in the municipal bond markets, the prospect of having the fund grow in size over the near term was limited,” he said. “We would like to see some stabilization in outflows and preferably inflows into municipal bond funds before launching the funds.” Vanguard's decision to put off launching muni bond funds and ETFs comes as tax-exempt funds have seen massive outflows. In November, muni bond funds saw $7.6 billion in outflows, according to Morningstar Inc. Twenty-five of the 30 muni bond ETFs are trading at a discount to their net asset values, according to IndexUniverse.com. For example, BlackRock Inc.'s iShares S&P National AMT-Free Municipal Bond ETF has fallen about 1.37% so far this year, according to Morningstar. The $1.6 billion ETF was trading at a -0.47% discount as of Jan. 12, according to Morningstar. Vanguard decided to shelve the funds in December after seeing the November volatility, but pulled the filing last week. “It's a good idea for them to wait,” said Marilyn Cohen, president and chief executive of Envision Capital Management Inc., which oversees $300 million in bonds for individuals. “There is so much consternation about the municipal bonds, and we continue to see leakage from funds and ETFs.” Email Jessica Toonkel at [email protected].

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