Yield Opportunities Abound In Muni Bond ETFs

Often-overlooked segment of the fixed-income market can help with your yield hunt.

Reviewed by: Patrick Luby
Edited by: Patrick Luby

The global decline in yields has made some municipal bonds—taxable and tax-free—worth considering as higher-yielding alternatives to taxable bonds.

In fact, they have been attractive enough that even non-U.S. investors and nonmuni-bond mutual funds were net buyers of munis in the first quarter (up $2 billion and $2.4 billion, respectively, based on the “Flow of Funds” report from the Federal Reserve on June 9).

Taxable Muni ETFs …

Build America Bonds (BABs) are a class of municipal bonds that were issued without the usual tax-exempt feature. A total of $181 billion of these taxable munis were issued between 2009 and 2011. As municipal bonds, BABs share the generally strong level of creditworthiness of similarly rated tax-exempt munis, yet the higher taxable yields can be attractive when compared with comparably rated corporate bonds.

There are two muni-bond ETFs—the PowerShares Build America Bond Portfolio (BAB | B-61) and the SPDR Nuveen Barclays Build America Bond ETF (BABS | D-95)—that are focused on Build America Bonds, and their recent performance compares favorably with nonmuni fixed-income ETFs, such as the Vanguard Long Term Bond Index Fund (BLV | C-99) and the SPDR Barclays Long Term Corporate Bond ETF (LWC | B-99).

Chart courtesy of StockCharts.com


… And Tax-Free Muni ETFs

Two interesting but often-overlooked muni ETFs are the VanEck Vectors CEF Municipal Income ETF (XMPT) and the Deutsche X-trackers Municipal Infrastructure Revenue Bond ETF (RVNU | D-73).

XMPT tracks an index comprising leveraged closed-end municipal bond funds. Because of the leverage in the underlying funds, XMPT has a high sensitivity to changes in interest rates and would underperform if rates rise. However, it does have an above-average credit quality because of the over-collateralization in the underlying funds and attractive recent dividends. (To learn more about interest-rate sensitivity and ETFs, read Duration as a Guide With Muni ETFs.)

RVNU is noteworthy because it offers exposure to municipal revenue bonds, a sector that has outperformed both the general obligation bond and the broad municipal bond sectors.


Select S&P Dow Jones Municipal Bond Indices As Of June 15, 2016

Index NameMTDQTDYTD1 Year3 Years5 Years10 Years
S&P Municipal Bond Index1.02%2.06%3.72%7.17%4.80%5.34%4.95%
S&P Municipal Bond General Obligation Index0.99%1.84%3.24%6.65%4.26%4.61%4.88%
S&P Municipal Bond Revenue Index1.10%2.38%4.29%8.37%5.61%6.21%5.16%
S&P Municipal BAB Select Index2.18%4.63%10.55%13.99%8.23%9.52%N/A


Depending on your specific asset allocation or income goals, many of the other muni-bond ETFs may be appropriate. (Read How To Pick The Right Muni Bond ETF for additional guidance.)

For tactical investors seeking temporary exposure to munis by using ETFs, evaluate the tradability of the funds relative to the transaction amount you are considering. Read this article for additional insight on ETF tradability.

The table below highlights all of the muni ETFs with dividend yield or yield to maturity of 2% or higher as of June 15, 2016. Yield to maturity is the rate of return anticipated on a bond if it is held until the maturity date and all the income is reinvested.


TickerFundDurationCredit Quality3-Month Return1-Year ReturnDividend YieldYTM
XMPTVanEck Vectors CEF Municipal Income ETF----6.62%20.32%4.82%--
HYDVanEck Vectors High-Yield Municipal Index ETF8.36B+3.97%10.13%4.46%5.16%
HYMBSPDR Nuveen S&P High Yield Municipal Bond ETF8.38B+5.26%9.96%4.30%7.91%
BABPowerShares Build America Bond Portfolio11.21A+5.67%13.02%3.94%4.43%
BABSSPDR Nuveen Barclays Build America Bond ETF11.31AA-8.06%16.85%3.65%4.35%
SHYDVanEck Vectors Short High-Yield Municipal Index ETF3.65B+1.94%3.41%3.16%4.33%
PZAPowerShares National AMT-Free Municipal Bond Portfolio5.60A-4.36%9.99%3.09%2.37%
MLNVanEck Vectors AMT-Free Long Municipal Index ETF10.14A+5.28%12.60%3.08%4.11%
PZTPowerShares New York AMT-Free Municipal Bond Portfolio6.33A-3.34%8.62%3.04%3.28%
FMBFirst Trust Managed Municipal ETF4.93BBB3.29%8.50%2.96%2.93%
RVNUDeutsche X-trackers Municipal Infrastructure Revenue Bond ETF9.31A-5.39%12.98%2.85%3.87%
GMMBColumbia Intermediate Municipal Bond ETF6.20BBB1.45%7.31%2.81%3.14%
PWZPowerShares California AMT-Free Municipal Bond Portfolio6.00AA4.37%9.85%2.72%2.54%
NYFiShares New York Muni Bond ETF7.07A+2.70%7.08%2.47%2.92%
MUBiShares National Muni Bond ETF6.92A+2.80%7.33%2.35%2.96%
CMFiShares California Muni Bond ETF6.66A+3.18%7.65%2.32%2.55%
INYSPDR Nuveen Barclays New York Municipal Bond ETF6.91AA3.50%9.73%2.32%2.62%
CXASPDR Nuveen Barclays California Municipal Bond ETF7.02AA3.88%9.91%2.30%2.75%
MUNIPIMCO Intermediate Municipal Bond Active ETF3.48A+2.16%6.40%2.24%1.50%
ITMVanEck Vectors AMT-Free Intermediate Municipal Index ETF7.26AA-3.11%8.93%2.21%2.87%


Patrick Luby is a fixed-income portfolio strategy specialist who has helped many of the industry's best advisors and their clients understand and navigate the municipal bond market for many years. He is the author of www.IncomeInvestorPerspectives.com and has written a number of muni ETF articles for ETF.com. Click here to go to his author page.

This is not a recommendation to buy, sell or hold any of the securities or strategies mentioned. The author does not provide investment, tax, legal or accounting advice. Investors should consult with their own advisor and fully understand their own situation when considering changes to their strategy, tactics or individual investments. Information is based on sources believed to be reliable, but its accuracy is not guaranteed. Additional information is available upon request.



Patrick Luby is the municipal strategist with CreditSights Wealth and has decades of experience in the municipal bond market.