In just two weeks, three relatively major Californian cities
have filed for Chapter 9 bankruptcy protection. The latest of
which was San Bernardino, a city of a couple hundred thousand
people that was facing a deficit of about $46 million.
The reasons for this rash of bankruptcies in the Golden State
could be due to several reasons. Some analysts blame the state’s
‘Proposition 13’ which limited property taxes and the rate at which
these levies could increase on a yearly basis (see Is The Bear
Market For Bond ETFs Finally Here?).
Still others look to the large costs of public unions and their
benefits as the main reason for the terrible financial conditions
in many cities in the state. These costs are arguably eating up a
big chunk of budgets and with smaller revenues flowing into city
coffers, many have been put into a precarious situation where
bankruptcy appears to be the only solution (see more in the Zacks
ETF Center).
This is especially true given the lack of more federal support,
particularly after the American Recovery and Reinvestment Act of
2009 already tried to offer up funds to struggling municipalities.
Clearly, this plan to give states and cities more cash only
postponed the day of reckoning, as revenues have not come back to
higher levels leaving many municipalities in the same situation
they found themselves in before the stimulus hit.
As a result of this confluence of events—lack of federal
support, state laws, and heavy influence of public unions—more
Californian cities could face bankruptcy or tumultuous times in the
months ahead. Given this, some investors may want to keep a close
eye on any bond investments they have in the region (read Floating
Rate Bond ETF Investing 101).
From an ETF perspective, there are currently three muni bond
ETFs targeting the Golden State. While these extremely diversified
products haven’t been too impacted by the events in a few of the
state’s cities yet, they could see more trouble should this trend
in a few cities turn into a widespread panic.
For investors concerned about this, we have highlighted the
three California muni bond ETFs which could act as a good barometer
for worries over the broad state’s financial market as it relates
to local level fixed income markets:
iShares California Municipal Bond Fund
(CMF)
This product tracks the S&P California AMT-Free Muni Bond
Index, a broad benchmark that produces a fund with roughly 325
holdings in total. The fund also has a relatively low cost, with
fees of just 25 basis points a year.
Bonds in this security are tilted towards relatively high
quality issues while generally maturing, on average, in about 5.66
years. In terms of sectors, bond are in the various purpose sector
(23.4%), while utility (22.6%), and transportation (11%) notes
round out the top three (see Three Muni Bond ETFs to Weather the
Coming Storm).
So far in 2012, CMF has risen by about 3.8% so far in 2012, not
too shabby considering the concerns building in the market place.
Currently, the yield on the product comes in at 2.06% for 30-Day
SEC terms while the taxable equivalent rate comes in at 3.17%.
SPDR Barclays California Municipal Bond Fund
(CXA)
This ETF tracks a broad benchmark of Californian municipal bonds
that have outstanding par values of at least $7 million. All
securities in the index must have an Aa3/AA- rating or higher in
order to be included in the fund. Overall, this gives the fund just
92 holdings in total although costs are just 20 basis points a
year.
In terms of exposure, the average maturity is relatively
high—suggesting modest interest rate risk—coming in at 16.22 years.
Top individual issues are dominated by bonds from Los Angeles as
three separate issues from America’s second most populous city are
in the top three holdings of the fund (read Looking For Income? Try
High Yield Muni ETFs).
Since the beginning of the year, CXA has done relatively well,
adding 4.8% including a 2.5% gain in the past quarter. From a yield
perspective, the product is relatively solid, coming in at 2.5% in
30 Day SEC terms, while the tax equivalent payout is roughly
3.85%.
PowerShares Insured California Municipal Bond Fund
(PWZ)
PowerShares’ entrant in the space tracks the BofA Merrill Lynch
California Insured Long-Term Core Plus Municipal Securities Index.
This extremely long benchmark name basically means that the
security will track a list of firms that are issued by California
(or Puerto Rico for some reason) that are U.S. dollar denominated,
investment grade, insured, and exempt from taxes.
With this focus, all of the 51 bonds in the fund mature in at
least 15 years with 40% maturing in no less than 20 years from now.
Puerto Rican bonds take the top spot at 6.1% of the fund, while San
Francisco’s BART system and the West Contra Costa school district
take up the rest of the top three from an individual issue
perspective (see The Forgotten Municipal Bond ETFs).
Since the start of January this year, PWZ has gained about 4.2%
with most of the gain coming in the first part of the time
period. The 30 Day SEC payout on the fund comes in at about
3.2% while the tax equivalent yield on the fund is a robust
4.92%.
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ISHARS-SP CA AM (CMF): ETF Research Reports
SPDR-NB CA BD (CXA): ETF Research Reports
PWRSH-IN CA MB (PWZ): ETF Research Reports
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