Charles Schwab launches cheapest ever municipal bond ETF
Charles Schwab, kingpin US discount broker, is launching the world’s cheapest municipal bond ETF.
The Schwab Municipal Bond ETF (SCMB) tracks the ICE AMT-Free Core US National Municipal Index.
The index is made of US dollar investment grade, tax-exempt debts issued by US municipal governments.
To qualify, bonds must have at least $25 million outstanding and must be part of a deal with an original offering size of at least $100 million.
As buying every bond in the index is infeasible – there are over 13,000 bonds in it – Schwab will use optimised sampling.
Bonds are chosen and weighted based on market capitalisation.
This is Schwab’s 29th ETF. The company has $576 billion stashed inside its ETFs, making it the fifth largest provider in the US.
The fund charges 0.03%, two basis points cheaper than VTEB from Vanguard.
Bernie’s commentary – best ETF of 2022?
From a British perspective, municipal bonds are always a bit strange. In the UK we’re different to our Anglo-Saxon counterparts in Australia, Canada, and the US in that we have no local government ( I am ignoring our district councils as judging by my potholed roads i dont think they do very much) . East Sussex and Kent are not separate jurisdictions in any meaningful sense. They don’t have their own elections and laws. This is in sharp contrast to New Hampshire and New York, New South Wales and Victoria. According to the UK Municipal Bond Agency, Lancashire County is the only county to have issued bonds.
In the US, muni bonds are usually issued by state governments. Governments then service them with taxes on utilities. For US residents – and US residents only – these bonds are tax free, unlike corporate bonds and treasuries. They also tend to have high credit ratings, yields 70+ bps above treasuries and lower duration profiles. So for US residents, muni bonds offer tax efficiencies, attractive yield, less interest rate risk and low default rates. For this reason, they’re a popular category and have $90 billion under management in the US. (However we haven’t really seen them thrive in Europe and Asia because the tax treatment is different.)
So there’s a lot to like about SCMB. The ultra-low fee mean that US investors will get to keep virtually all the yield to themselves. (Schwab will need to net billions to make SCMB breakeven, but that’s their problem). Meanwhile, ETFs are the best vehicle for accessing muni bonds as they cannot be traded directly with any degree of efficiency by advisers and retail investors. I’d rate this as one of the best fund’s launched this year.