Following Detroit's record-breaking municipal bankruptcy
filing, we've been fielding a lot of questions from investors.
For the broader municipal bond market,
do not anticipate a widespread systemic effect
and investors should expect little market impact as
Motown's problems have long been known to bond traders. But what
does this event mean for holders of muni bond
In terms of exposure, none of our iShares ETFs hold Detroit
general obligation bonds. While the iShares National AMT-Free
Muni Bond ETF (
) does hold some Detroit-related paper, these bonds are not
included in the bankruptcy and are currently highly-rated by the
credit agencies. Further, these bonds only make up 0.12% of the
ETF's $3.3 billion in assets.
At the same time, this event does raise questions about how a
fixed income ETF could be impacted if one of its holdings
defaulted or filed for bankruptcy. We have had more questions of
this sort around our muni funds recently as there have been
several bankruptcies since 2011, with Detroit following Stockton
and Vallejo, two cities in northern California.
The first thing to know is that our muni bond ETFs' track muni
indices that use a fairly conservative approach when it comes to
determining eligibility. The indices include only investment
grade bonds, and all it takes is one of the agencies (S&P,
Moody's or Fitch) to downgrade an issuer to below investment
lower than BBB-/Baa3
) and the issuer's bonds will be removed from the index at the
next monthly rebalance.
In the case of Detroit's general obligation bonds, they were
removed from the index that MUB tracks all the way back in 2009.
Most bond indexes are rebalanced on a monthly basis as are most
bond ETFs. This means that within a month of the downgrades,
these Detroit bonds would have been removed from the index; our
MUB fund exited its positions around the same time as the
There is still much uncertainty at this point around Detroit.
The city, which listed its liabilities at $18 billion, must prove
its insolvency to a federal judge to qualify for Chapter 9
protection. It is expected to be a long and protracted battle.
The bottom line for ETF investors is that investment grade muni
bonds rarely "jump to default" (i.e. default while they still
carry investment grade ratings).
If you hold an investment grade muni ETF, your risks are much
lower than if you own, say, a high yield ETF which holds
below investment grade bonds that are more prone to
default. Finally, ETF investors with questions about
holdings can always take advantage of the transparency of ETFs;
all fund holdings are published on a daily basis.
Matt Tucker, CFA, is the iShares Head of Fixed Income
Strategy and a regular contributor to
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