Van Eck Global filed updated paperwork with the Securities and Exchange Commission to offer a fund-of-funds ETF comprising closed-end funds focusing on municipal debt securities, amending a similar filing last month detailing a fund-of-funds ETF focused on taxable debt.
Van Eck's ambitions to market fund-of-funds ETFs focused on fixed-income closed-end funds come in the wake of the rollout of a closed-end fund-of-funds fixed-income security from Invesco PowerShares in February 2010. The PowerShares CEF Income Composite Portfolio (NYSEArca:PCEF) has gathered almost $215 million in assets since its launch, according to data compiled by IndexUniverse.
The Market Vectors Municipal Bond Closed-End Fund ETF will track Van Eck's proprietary Market Vectors Municipal Bond Closed-End Fund Index, which is focused on closed-end funds holding municipal bonds issued by states or local governments or agencies, the income of which is exempt from U.S. federal income tax.
The filing, which didn't include the proposed fund's ticker or annual expense ratio, said the Investment Company Act of 1940 limits the weighting of each individual closed-end fund in the ETF to 3 percent, which could contribute to the planned ETF's tracking error.
Indeed, an ETF focused on closed-end funds is likely to have its share of problems, as IndexUniverse Director of Research Dave Nadig wrote in a blog titled "PCEF:Powdering The Pig" after the rollout of the PowerShares CEF Income Composite Portfolio (NYSEArca:PCEF). PCEF taps into high-yielding fixed-income and option-related CEFs in an attempt to deliver high payouts and strong returns.
Closed-end funds trade at premiums or discounts to their NAVs, and there's no reason they wouldn't in an ETF wrapper. Moreover, closed-end funds often use leverage to enhance returns, which could raise the risk profile of a fund-of-funds security like the ones Van Eck is planning.
Paperwork New York-based Van Eck filed last month described the Market Vectors Fixed Income Closed-End Fund ETF.
Van Eck said in the filing that the proposed ETF will track the Market Vectors Fixed Income Closed-End Fund Index, which is focused on U.S. closed-end funds that own taxable fixed-income securities, including investment-grade and/or high-yield securities.
It wasn't immediately clear why Van Eck changed course, as companies aren't typically authorized to discuss funds that are in registration at the SEC.
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