Patrick Luby is the municipal strategist at CreditSights Wealth.
With most municipal bond total return indices strongly positive, year-to-date net flows into muni bond ETFs have now eclipsed the $2 billion mark, although the pace of inflows is slower than last year, when $3.2 billion was added in the same period.
(Muni market performance at the same point last year was very similar to this year: As of 6/23/16, the BofAML Muni Index was up 3.6%, while this year it is up 3.9%). Note that the YTD total return for the 7- to 12-year index lags the 22+ year index by only 10 basis points, providing a reminder that it is not always necessary to take on maximum risk to earn a reasonable return.
Even though total returns are positive, investors appear to be cautious in reinvesting the more than $35 billion of principal returned from called or matured muni bonds so far this month. While it is too early to fully evaluate this year's reinvestment activity, month-to-date flows into muni mutual funds and ETFs combined are just over $1 billion. (See Muni ETFs: No Summer Vacation for additional information about muni market redemption flows.)
Investors who want to maintain or increase muni exposure while seeking specific bonds may wish to consider the larger muni ETFs as liquid ways to access the market for a short-term time period.
As can be seen in the Muni ETF table below, the largest muni ETFs support significant trading volumes over and above their net asset flows. Investors, especially temporary investors, should be cautious in selecting muni ETFs, as not all funds have similar demand and liquidity.
