Muni ETFs Walk Into Spotlight

From Fed buying to state bankruptcies, the segment has been the center of a lot of talk.

Reviewed by: Cinthia Murphy
Edited by: Cinthia Murphy

Municipal bond ETFs have been in the spotlight lately. The Federal Reserve’s announcement last month that it would purchase investment-grade muni bonds as part of its efforts to provide liquidity, and more recently, the debate over whether states should be allowed to file for bankruptcy, have brought attention to the segment.

In the past month, since the Fed’s decision, the biggest muni bond ETF in the market, the iShares National Muni Bond ETF (MUB), has rallied 9.4% and picked up a net of $100 million in fresh net assets.

The $15 billion-in-assets MUB invests in more than 4,000 investment-grade state and local government muni bonds in a portfolio that’s roughly one-third general obligation bonds, two-thirds revenue bonds.

Chart courtesy of


MUB may be the biggest and most liquid muni bond ETF—one that attracts the bulk of the tactical demand from the trading crowd—but it isn’t the only fund attracting investor attention.

Many Muni ETF Choices

The Vanguard Tax-Exempt Bond ETF (VTEB), with almost $7 billion in total assets, has picked up about $60 million in the past month. Vanguard assets are often thought as “sticky assets,” as Vanguard investors are often long-term minded. VTEB costs only 0.06% in expense ratio, or $6 per $10,000 invested for a portfolio of nearly 4,400 bonds—it’s a really inexpensive alternative.

There are also a number of funds that approach the segment through an active manager, like the First Trust Managed Municipal ETF (FMB), or some that focus on a segment of the space such as the shorter-term bonds—the likes of the SPDR Nuveen Bloomberg Barclays Short Term Municipal Bond ETF (SHM)or the Invesco Taxable Municipal Bond ETF (BAB), which focuses on taxable bonds. These are just some of the investment-grade muni bond ETFs available among the 50-plus funds in the market today.

So, how do you choose a muni bond ETF for today’s market?

Like everything else in investing, it depends on what your goal is. One of the attractive features of this fixed income segment is that muni bonds’ interest is exempt from federal income taxes.

Let’s Hear From An Expert

To help inform that decision, we caught up with muni bond expert Patrick Luby, who’s the municipal strategist with CreditSights, and asked him to put recent market moves and talk into context. Here’s what he said: What's your take on this ongoing conversation about allowing states to declare bankruptcy for the first time? Do states need "permission" to default on an obligation? And if this were to happen, how does it impact munis and investors owning them?

Patrick Luby: We believe that Senator McConnell’s comments have been taken out of context, and they did not sound to us as implying an actual policy position.

However, the speed at which his comments have propagated around the market provides evidence of the significance attached to even the utterance of the word “bankruptcy” by a senior member of Congress. The municipal bond market relies both on the ability to repay what has been borrowed as well as the willingness to take whatever steps are necessary to do so. A reduction in the stigma of bankruptcy undermines confidence.

We view the likelihood of a change by Congress to permit states to declare bankruptcy to be low, but if it did happen, it would increase the yields that investors would expect to be paid to invest in higher-risk issuers as well as increase the importance of diversification and full-time credit surveillance of lower quality/high yield portfolios. How will Fed buying come across? Will it impact different parts of the muni bond market differently?

Luby: The Fed has been very helpful in restoring liquidity in the short end of the municipal bond market, which has also freed up capital to allow market participants to be more involved in other parts of the market.

The violent decline in prices appeared to draw in some incremental demand, but there is also still some selling going on, driven at least in part by investors redeeming shares from open-end municipal bond mutual funds, which has led to selling of long duration bonds.

Generally speaking, the overall liquidity in the municipal market seems to be less, and therefore more prone to volatility when there are unexpected headlines. ETF investors who see opportunities in a part of the market that dovetails with their own objectives should be prepared to be nimble—whether it’s selling when ETFs are at a premium to NAV or buying at a deep discount or when yields have moved higher. The markets are moving and changing direction quickly.

The Fed’s plan is designed to assist states and large cities and counties navigate through COVID-19-induced cash flow challenges, which should be a good thing for the near term, and because the Fed is willing to lend for as long as 24 months, the program can be a powerful tool to get past the current challenges until we see what sort of permanent economic changes may be ahead. If you’re an investor, is the opportunity better in broader strategies (MUB) or in short-term muni bond ETFs (SHM or the iShares Short-Term National Muni Bond ETF (SUB)), or even in high yield?

Luby: The answer to that is always a question about what the investor is trying to pursue. If they’re wanting to add a liquid position to a portfolio of individual bonds that could be easily added to or subtracted from, then MUB is difficult to argue against, as it’s the most heavily traded and therefore liquid muni ETF. But that also makes it more sensitive to changes in sentiment that could drive flows out of it and affect pricing or the bid/ask spread.

Investors seeking short to intermediate duration can find some excellent muni ETFs that provide wide diversification and pursue a duration target. There are also a couple of actively managed muni ETFs that have very experienced portfolio managers and performed well.

10 Best-Performing Investment-Grade Muni Bond ETFs In The Past Month Alone:

For a complete list of muni bond ETFs, check out our Muni ETF Channel.

Contact Cinthia Murphy at [email protected]

Cinthia Murphy is head of digital experience, advocating for the user in all that does. She previously served as managing editor and writer for, specializing in ETF content and multimedia. Cinthia’s experience includes time at Dow Jones and former BridgeNews, covering commodity futures markets in Chicago and Brazil equities in Sao Paulo. She has a bachelor’s degree in journalism from the University of Missouri-Columbia.