Muni ETFs Gaining Assets From Mutual Funds
The two largest muni bond ETFs have had opposing flows in 2023 after the category pulled in significant assets last year.
Municipal bond exchange-traded funds are pulling in record cash as Bloomberg TV reported on Monday citing Barclays data, with ETFs making up nearly 11% of total municipal fund assets. But while the overall trend shows flows going into muni ETFs and coming out of muni mutual funds, that’s not a completely one-way migration.
Most recently, municipal bond ETFs are seeing a hiccup after being on a tear in 2022. The category has seen roughly $600 million in outflows year to date. Meanwhile, mutual funds saw significant outflows in 2022 and have pulled in several billion dollars this year.
Consider also that two of the largest muni bond ETFs have seen opposing flows year to date. The $32 billion iShares National Muni Bond ETF (MUB) has lost more than $567 million year to date, while the $25.4 billion Vanguard Tax-Exempt Bond ETF (VTEB) has gained $340.7 million in the same time period. Although this year muni bond ETFs have seen more than half a billion dollars in outflows, in the past 12 months, the category gained almost $28 billion.
CreditSights Senior Municipal Strategist Patrick Luby indicates that the overall picture is somewhat complicated: While municipal bond mutual funds are primarily dominated by individual investors, there is a significant number of professional investors and asset owners who also use muni bond ETFs.
“It's not unusual, for example, to see a P&C insurance company that has a large portfolio of individual bonds having to have a small part of that portfolio allocated to the ETFs so that they have access to the exchange-traded liquidity,” he said. “You’ve got a more diversified constituency of market participants in muni ETFs.”
Two Different Muni Products
This year’s outflows don’t concern Luby. He notes that 2022 was a huge year for the space, and that MUB in particular is more of a tactical play due to its size and liquidity. After new issuances in the muni space slowed November through January, investors who take a more active approach to the space were able to start putting their money to work over the long term in individual bonds.
VTEB, on the other hand, is a Vanguard-issued product, and the firm is known for promoting its buy-and-hold philosophy to its many shareholders. Moreover, Luby notes that VTEB is a share class of Vanguard’s passive muni bond mutual fund, so its holdings are not disclosed daily.
“The portfolio is not disclosed on a daily basis, like MUB’s is, so that tends to discourage some of the really large, very active market participants,” he said.
Looking at the municipal bond market overall, Luby says he is “constructive” in his view.
“I'm expecting positive total returns for the year. I think that new issue volume is going to be up slightly for the year but that in the first half of this year, the new-issue market is going to be on the slower side, because we're still in the rate hike cycle of the Fed,” he added, noting that historically May has been one of the best-performing months of the year for municipal bonds.
Contact Heather Bell at [email protected]