Franklin Templeton debuts two actively managed municipal bond ETFs

Sep 1st, 2017 | By | Category: Fixed Income

Franklin Templeton Investments has launched two new actively managed municipal bond ETFs, the Franklin Liberty Intermediate Municipal Opportunities ETF (NYSE Arca: FLMI) and Franklin Liberty Municipal Bond ETF (NYSE Arca: FLMB).

Franklin Templeton debuts two actively managed municipal bond ETFs

Franklin Templeton debuts two actively managed municipal bond ETFs

Municipal bonds are debt securities issued by a state, municipality or county to finance its capital expenditures. They are exempt from federal taxes and from most state and local taxes. Municipal bonds fall within two general categories: general obligation bonds (those that are secured by the authority’s pledge to use tax revenues to repay bond holders) and revenue bonds (those that rely on income generated from a specific project into which the funds were allocated to repay bond holders).

Due to the inherent link between taxes raised and ability to pay, the state of the broad US economy generally plays an important role in investors’ analysis of general obligation bonds. The continuing recovery of the US economy has provided a boost to ETFs covering this sector lately.

Investors should be wary of signs that the Federal Reserve will further increase interest rates to fight inflation as, similar to most fixed income securities, the value of municipal bonds moves inversely to rates.

Revenue bonds generally require closer examination of the proposed project for which the funds will be dedicated.

The new funds aim to provide investors with a high level of current income that is exempt from federal income taxes, including federal alternative minimum tax.

“Creating a world class ETF business is our central objective, and we are delighted to unveil our new muni ETFs amid a surge in client interest in fixed income ETFs,” said Patrick O’Connor, global head of ETFs at Franklin Templeton Investments. “Leveraging Franklin Templeton’s world class municipal bond platform with more than $71 billion in assets under management, these actively managed ETFs seek to generate yield exempt from federal taxes, allowing investors to keep more of what they earn.”

FLMI and FLMB are generally differentiated by the dollar-weighted average portfolio maturity levels they target and the credit ratings of municipal securities they may purchase:

FLMI may invest in municipal securities rated in any rating category, including below investment grade and defaulted securities, and seeks to maintain a dollar-weighted average portfolio maturity of three to ten years. The fund is managed by James Conn, senior vice president and portfolio manager, Christopher Sperry, vice president and portfolio manager, and Daniel Workman, vice president and portfolio manager.

FLMI’s benchmark is the Barclays Municipal 1-15 year Index and it has a total expense ratio (TER) is 0.30%.

FLMB on the other hand only invests in municipal securities rated in one of the top four ratings categories and seeks to maintain a dollar-weighted average portfolio maturity of five to 15 years. The fund is managed by Conn, Sperry and Nicholas Bucklin, vice president and portfolio manager.

FLMB’s benchmark is the Bloomberg Barclays Municipal Bond Index. Its TER is also 0.30%.

Investors looking for a passively managed exposure to the municipal bond market may wish to investigate ETFs from iShares and SPDR ETFs.

The iShares National Muni Bond ETF (NYSE: MUB) has over $8.8bn in assets under management, making it the largest ETF to track the US municipal bond market. The ETF tracks the S&P National AMT-Free Municipal Bond Index, providing exposure to over 3,000 holdings, thereby offering a diversified investment.

State Tax-Backed Bonds (37.4%) make up the largest sector, followed by Transportation (15.7%), Utility (14.3%) and Local Tax-Backed Bonds (11.6%). The fund adopts a barbell portfolio with significant holdings in the ranges of 0-3 years (19.6%), 3-6 years (13.5%), 15-20 years (11.0%), 20-25 years (14.2%) and 25+ years (13.9%). AA-rated bonds make up the largest credit quality with 55.6%, followed by AAA-rated (24.6%) and (A-rated 15.5%) It has a TER of 0.25%.

The SPDR Nuveen Barclays Municipal Bond ETF (NYSE: TFI) invests its $2.5bn in AUM primarily in municipal bonds with maturities of 20-30 years (25.0%), 10-15 years (20.0%), 15-20 years (15.7%) and 5-7 years (10.2%). There are over 880 holdings in the fund with General Obligation Bonds making up the majority of the fund’s holdings with GO Local (21.1%) and GO State (19.9%) holding the largest weights. The credit quality with the largest weight is AA (75.3%) followed by AAA (24.4%). It has a TER of 0.23%.

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