Columbia Threadneedle launches smart beta municipal bond ETF

Oct 11th, 2018 | By | Category: Fixed Income

Columbia Threadneedle Investments has expanded its smart beta line-up with the launch of the Columbia Multi-Sector Municipal Income ETF (MUST US) on NYSE Arca.

Columbia Threadneedle launches municipal bond ETF with ‘smart’ selection process

Marc Zeitoun, Head of Strategic Beta at Columbia Threadneedle.

The fund provides exposure to the US municipal bond market via a rules-based bond selection process that seeks to improve on traditional passive approaches.

The asset manager notes that traditional municipal bond indices, which typically weight constituents based on indebtedness, can lead to sub-optimal risk and return characteristics and distort the true investment opportunity set by favouring larger state general obligation bond issuers at the expense of revenue-backed bonds.

Columbia’s new fund seeks a smarter approach, intended to boost yield and risk-adjusted return, by tracking the proprietary Beta Advantage Multi-Sector Municipal Bond Index, an index developed by the firm’s municipal fixed income team.

Marc Zeitoun, Head of Strategic Beta at Columbia Threadneedle Investments, said, “Even though most investors’ current exposure to municipals is through actively managed portfolios or individual bonds, we’ve seen a growing interest in passive products in the municipal space. Given the limitations of existing municipal bond benchmarks, we opted to draw upon our expertise in managing active municipal bond portfolios to build an innovative, strategic beta fund that leverages our best thinking, but in a cost-effective, risk-managed way.”

Catherine Stienstra, Head of Municipal Bond Investments at Columbia Threadneedle Investments, added, “Today’s municipal market is comprised of nearly $4 trillion in assets spread out among more than one million debt offerings from 80,000 issuers. In the muni space, buying individual bonds or purchasing a debt-weighted benchmarked product doesn’t give investors the diversification they need, nor the ability to manage credit risk transparently and efficiently. We created MUST with the goal of simplifying investors’ municipal bond exposure without compromising their investment objectives.”

Index methodology

The index features publicly issued US dollar-denominated, fixed rate municipal bonds from five segments of the municipal debt market: core revenue (45% index weight), healthcare (20%), high quality revenue (15%), core general obligations (10%), and high yield (10%).

California bonds, Guam bonds, Puerto Rico bonds, US Virgin Island bonds, other US territories, commonwealths and possessions, pre-funded bonds, insured bonds, floaters, callable bonds with less than one year to call, tobacco bonds, and derivatives are all excluded from the index.

Each of the five segments applies their own custom constraints regarding size, maturity, and credit quality of eligible bonds. Once the selection has been narrowed down, each segment is weighted by market capitalization as are constituents within each segment.

The index contains over 5,500 securities; however, due to the fund’s representative sampling approach, it contains approximately 120 holdings at any given time.

According to Columbia, the fund is a suitable vehicle to serve as a core municipal bond allocation in investors’ portfolios but may also complement traditional core holdings to deliver tax-exempt income and capital growth.

It comes with an expense ratio of 0.28%.

Potential alternatives in the municipal bond space include the SPDR Nuveen Barclays Municipal Bond ETF (TFI US), which has over $2.7bn in assets and comes with an expense ratio of 0.23%, and the iShares National Muni Bond ETF (MUB US), which has $9.4bn in AUM and an expense ratio of 0.07%.

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