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The Vanguard Group Inc. has withdrawn the documents it filed with the Securities and Exchange Commission to launch three municipal bond index funds and exchange-traded funds.
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 municipal bond markets, said Chris Alwine, head of the municipal bond group at Vanguard, which has $83 billion in municipal bond assets.
One of the most challenging periods for index funds to track their indices is when they first launch because the assets are still small, Mr. Alwine said. When the fund gets bigger, the tracking improves, he said.
But with the recent volatility in the municipal markets, gaining assets would be difficult, he 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,” Mr. Alwine 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 municipal bond funds and ETFs comes as tax-exempt funds have seen massive outflows. In November, municipal bond funds recorded $7.60 billion in outflows, according to Morningstar Inc.
Twenty five of the 30 municipal 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 1.37% so far this year, according to Morningstar Inc. 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 today.
“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.”
