We (GridLex) analyze large data sets to provide investment, trading and risk management insights to clients. As part of our municipal bond and fund analytics service, we monitor the underlying portfolio holdings of more than 200+ muni mutual funds and ETFs that control more than 80% of mutual fund and ETF assets. One element of our liquidity analysis examined trading data for the underlying muni fund holdings and ETFs for a given period and determines what percentage of the underlying bond holdings have not been traded in the past 90 days. For example, if a fund held a bond – ABC- and if that bond was not traded in the past 90 days, it was considered illiquid.
Funds with a high percentage of assets that have not been actively traded would use non-market based pricing for a significant portion of their assets and as a result would run the highest risk of having stale pricing. The 90 day inactive trading is a conservative baseline, since most ETFs and funds would need to use non-market based pricing sometimes even if the bonds have not traded for a day. In the current volatile period, even short durations of non-market based pricing impact overall returns.
To examine the effects of illiquid assets on stale pricing and returns, we picked two mutual funds with the most illiquid assets in their peer group – Nuveen Intermediate Tax Free Fund (FMBIX , FAMBX , FMBCX) and Thornburg Intermediate Municipal Fund (THIMX, THMCX) – and compared them to two of the largest ETFs with a similar profile – S&P National AMT-Free Municipal Bond Fund (MUB) and SPDR® Nuveen Barclays Capital Municipal Bond ETF (TFI).