New S&P Indexes Clear Vanguard to Launch Muni ETFs

Two new Standard & Poor’s indexes tracking municipal bonds launched yesterday, paving the way for Vanguard to enter the municipal exchange-traded fund business.

Vanguard, which is based in Valley Forge, Pa., in June announced plans to launch three muni bond ETFs — one each for short-, intermediate-, and long-term munis. These passively managed ETFs will be designed to mimic the performance of a target index maintained by Standard & Poor’s. Before the ETFs could launch, Standard & Poor’s had to create the indexes the funds will be created to track.

Standard & Poor’s yesterday created indexes for the short and intermediate ETFs — called respectively the S&P 1-5 Year National AMT-Free Municipal Bond Index and the S&P Intermediate Term National AMT-Free Municipal Bond Index.

Vanguard’s long-term ETF will track the S&P National AMT-Free Municipal Bond Index, which has existed since it was created at the behest of iShares when that company launched its long-term muni ETF in 2007.

The $1.97 billion iShares S&P National AMT-Free Municipal Bond Fund remains the biggest muni ETF. There are at least 29 municipal ETFs with $7.49 billion in assets. Vanguard would be the second fund complex to try and mirror Standard & Poor’s indexes. The iShares brand, which runs $2.76 billion in municipal ETFs, also tracks Standard & Poor’s indexes.

Invesco Powershares’ $1.4 billion in muni ETFs track Bank of America Merrill Lynch indexes, with the exception of the $750 million variable-rate demand obligation fund, which tracks Municipal Market Data’s VRDO Index. The Van Eck and State Street Global Advisors complexes, which respectively manage $523.7 million and $2.33 billion in muni ETFs, both track Barclays indexes.

Pacific Investment Management Co.’s two muni ETFs and Grail McDonnell’s fund also track Barclays, though the ETFs are actively managed — meaning they try to beat their indexes rather than match them.