Muni ETFs with in-cash creations

Indexuniverse has an interesting article on in-cash ETF share creations for muni ETFs as opposed to in-kind creations. The article attempts to explain how in-kind creations can help to eliminate ETFs trading premiums in cases where the underlying securities are relatively illiquid.

The following figure shows the trading premiums of the two types of ETFs.



Clearly allowing cash creations helped to reduce the trading premiums.

It sure looks like there is yet another factor to consider when purchasing ETFs, especially if the underlying assets are illiquid.

Taxable investment-grade bond ETFs

I am looking for an investment-grade bond ETF to round up my portfolio. The criteria I used include the following:

  • Low expenses : the lower the expense ratio, the better.
  • Diversification : for investment grade bond funds, generally the more holdings, the better.
  • Amount of assets & trading volume : generally the larger the better (improves liquidity, smaller trading spreads).
  • Duration : duration is a measure of the sensitivity of the fund price to interest rate changes. At this juncture in the economy, I would prefer not to go too long on duration.
  • Credit quality : no junk bond fund for me.

The ETFs that I narrowed down to include BSV, CSJ, AGG, BIV, CIU and LQD. These are listed in the table below:

From the look of it, I would probably go with CSJ,  the iShares Barclays 1-3 year credit bond ETF.

Sequence for ETF tax-loss harvesting

A recent question on the Bogleheads forum was Exact sequence of an ETF TLH transaction:

Is there a recommended method of doing a TLH? I tend to like to TLH on market downturns if at all possible. Currently I start with the ETF that I would like to sell. I look at the bid/ask, and I generally choose the higher “ask” price to set as my limit order. Even though I’ve chosen a down day to sell this ETF, obviously I would like to get on the higher side of the bid/ask spread since I am selling. The moment the sale goes through I start working on buying the replacement ETF. At this point I do not like to miss the opportunity to complete the sale due to greed. I put my limit order at exactly the lower “bid” (not the higher ask) price. I observe it closely for a few minutes to half an hour to see what it’s doing. If it looks like it’s veering upwards I will raise my limit to the current bid price. If after a while it looks like I’m going to miss the boat, I simply raise my limit order to the ask price instead of the bid. Generally this will execute the order. Most of the time I execute both orders within a few minutes to half an hour without being hosed too serverely.

I thought it would be interesting to hear what people have to say. Anyway, the following is what I do:

I enter the two orders first, but with out-of-range prices using limit orders. I open two windows — one for the purchase, one for the sale.

At the point when I want to execute the TLH, I modify one of the existing order to the price which would complete the transaction. As soon as I verify that the order is completed, I modify the price of the second order (modifying an order’s price is much faster than entering the complete order).

Depending on the ETFs, sometimes I do the purchase first and sometimes I do the sale first. Generally, I like to complete the transaction with the lower liquidity / volume ETF first.

My preference for completing the transaction on the ETF with lower liquidity / volume first is because if I had done it the other way round, I might be unable to complete the second transaction at a reasonable trading transaction cost (due to undesirable bid-ask spread).