This exchange-traded fund has delivered solid gains, despite a shaky economy. By Nellie S. Huang, Senior Associate Editor October 7, 2011 The earth shifted under the market for municipal bonds last December, after a prominent analyst predicted that a slew of state and local governments would default on their IOUs. But munis didn’t crumble. Year-to-date through September 8, the average intermediate-maturity tax-free bond returned 7.9%.SEE ALSO: Our Special Report on Exchange-Traded Funds Market Vectors Intermediate Muni Index ETF (symbol ITM) has done even better, gaining 9.4%. But the benchmark it tracks, the clumsily named Barclays Capital AMT-Free Intermediate Continuous Municipal Index, returned 10.0%. What gives? The discrepancy lies in the way the ETF portfolio is created. The Barclays index holds some 13,000 issues; the ETF, at last report, held just 387. Van Eck Associates, which runs the ETF, uses proprietary software to pick a sampling of bonds designed to mimic the index. “We’re not doing an exact replication,” says co-manager James Colby III. Instead of using the usual five- to ten-year maturity range that most intermediate muni funds stick to, Colby stretches his to a six- to 16-year window. The reason: He says investors can capture a greater percentage— 90% or better—of the “available yield” in municipal bonds by extending maturities by a few years. The fund’s average duration, a measure of interest-rate sensitivity, is 6.4 years, compared with 5.3 years for its peer group, according to Morningstar. The figure suggests that the ETF would lose 6.4% if interest rates rose one percentage point.