Municipal bond exchange-traded funds (ETFs) provide investors with diversified access to the municipal bond market. Municipal bonds, or munis, are debt instruments issued by states, municipalities, or counties for the purpose of financing public capital expenditures, such as the construction of highways, bridges, and schools. For investors, munis generally offer tax-free interest income. While many of these bonds are rated "investment grade" by ratings agencies, indicating a relatively low degree of credit risk, they are not risk-free. The perceived risk of munis was heightened last year amid the COVID-19 pandemic, which has placed enormous financial strain on state and municipal budgets. The Federal Reserve took measures early in the pandemic in order to help calm the municipal bond market. A municipal bond ETF can help to reduce risk through holding debt issued by a broad range of states, municipal governments, or agencies.
- Municipal bonds underperformed the broader market over the past year.
- The ETFs with the best 1-year trailing total return are MMIN, FLMB, and MUST.
- The top respective holdings of these ETFs are bonds issued by: the Metropolitan Transportation Authority of New York; the Iowa Finance Authority; and the New York City Municipal Water Finance Authority.
There are 39 distinct municipal bond ETFs that trade in the U.S., excluding inverse and leveraged ETFs, as well as funds with less than $50 million in assets under management (AUM). Municipal bonds, as measured by the Bloomberg Barclays Municipal Bond Index, have underperformed the broader market with a total return of 4.5% over the past 12 months compared to the S&P 500's total return of 18.9%, as of February 10, 2021. The best-performing municipal bond ETF for Q2 2021, based on performance over the past year, is the IQ MacKay Shields Municipal Insured ETF (MMIN). We examine the top 3 best municipal bond ETFs below. All numbers below are as of February 11, 2021.
- Performance over 1-Year: 6.4%
- Expense Ratio: 0.31%
- Annual Dividend Yield: 1.99%
- 3-Month Average Daily Volume: 173,933
- Assets Under Management: $379.6 million
- Inception Date: October 18, 2017
- Issuer: IndexIQ
MMIN is an actively-managed ETF that aims to provide investors with current income that is exempt from federal income taxes by investing primarily in insured municipal bonds. It mostly invests in investment-grade munis that are accompanied by an insurance policy guaranteeing the payment of both principal and interest. The fund follows a relative value strategy based on credit analysis, yield curve positioning, and sector rotation. Its top three holdings include bonds issued by the Metropolitan Transportation Authority of New York; the West Contra Costa Unified School District of California; and the Medford Oregon Hospital Facilities Authority Revenue Refunding Asante Health System.
- Performance over 1-Year: 6.4%
- Expense Ratio: 0.30%
- Annual Dividend Yield: 2.22%
- 3-Month Average Daily Volume: 38,995
- Assets Under Management: $117.0 million
- Inception Date: August 31, 2017
- Issuer: Franklin Templeton Investments
FLMB, formerly called the Franklin Liberty Municipal Bond ETF, is an actively managed ETF that seeks to provide current income exempt from federal income taxes. It provides exposure to municipal securities rated in the top four ratings categories at the time they are purchased. The fund is comprised of 210 holdings with an average duration of 8.45 years and a weighted average maturity of 13.31 years. Its top three holdings include bonds issued by the Iowa Finance Authority; the state of New Jersey; and the state of California.
- Performance over 1-Year: 5.7%
- Expense Ratio: 0.23%
- Annual Dividend Yield: 2.30%
- 3-Month Average Daily Volume: 16,425
- Assets Under Management: $71.9 million
- Inception Date: October 10, 2018
- Issuer: Columbia Threadneedle Investments
MUST tracks the performance of the Beta Advantage Multi-Sector Municipal Bond Index, which employs a rules-based, multi-sector strategic beta approach to gauging the performance of the U.S. tax-exempt bond market. It focuses on five sectors of the municipal debt market with a focus on yield, quality, maturity, liquidity, and interest rate sensitivity. The ETF uses a representative sampling approach, which results in a smaller number of holdings than found in the index. It seeks to provide tax-exempt income by following a rules-based approach and offers a highly diversified portfolio of municipal bonds in a range of sectors. Its top three holdings include bonds issued by the New York City Municipal Water Finance Authority; the New Jersey Transportation Trust Fund Authority; and the Metropolitan Transportation Authority of New York.
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