Best Municipal Bond ETFs for Q3 2022

PVI, IBMK, and BSMM are the best municipal bond ETFs for Q3 2022

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. A municipal bond ETF can help to reduce risk through holding debt issued by a broad range of states, municipal governments, or agencies.

In the first week of April, municipal bond funds saw $4.8 billion in outflows, the largest exit since early 2020, amid fears about inflation and rising interest rates. Some muni bonds, nonetheless, have become more attractive to investors. This includes long-maturity investment-grade municipal bonds, where tax-exempt yields have reached 4%, the highest in several years.

Key Takeaways

  • Municipal bonds underperformed the broader market over the past year.
  • The municipal bond exchange-traded funds (ETFs) with the best one-year trailing total returns are PVI, IBMK, and BSMM.
  • The top holdings of these ETFs are municipal bonds issued by the Triborough Bridge and Tunnel Authority, the San Diego County Regional Transportation Commission, and the San Diego County Water Authority, respectively.

There are 48 distinct municipal bond ETFs that trade in the United States, 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 Municipal Bond Index, have underperformed the broader market over the past 12 months, with a total return of -8.9% compared with the S&P 500’s total return of -4.4%, as of May 9, 2022. The best-performing municipal bond ETF, based on performance over the past year, is the Invesco VRDO Tax-Free ETF (PVI). We examine the three best municipal bond ETFs below. All numbers below are as of May 9, 2022.

Invesco VRDO Tax-Free ETF (PVI)

  • Performance Over One-Year: -0.2%
  • Expense Ratio: 0.25%
  • Annual Dividend Yield: N/A
  • Three-Month Average Daily Volume: 14,215
  • Assets Under Management: $53.5 million
  • Inception Date: Nov. 15, 2007
  • Issuer: Invesco

PVI seeks to track the ICE US Municipal AMT-Free VRDO Constrained Index. The index targets the performance of U.S. dollar tax-exempt variable rate demand obligations (VRDOs) that are publicly issued by U.S. states, territories, and their political subdivisions. They have interest rates that reset daily, weekly or monthly. The ETF does not buy every security in the Index and, instead, uses a sampling approach. Because of its focus on the shortest part of the maturity curve, PVI carries little to no interest rate risk. While this makes it a safer investment in periods of high volatility, it also limits yields. The fund's top three holdings are bonds issued by the Triborough Bridge and Tunnel Authority; Indianapolis, Indiana Multifamily Housing; and the Missouri State Health and Educational Facilities Authority.

iShares iBonds Dec 2022 Term Muni Bond ETF (IBMK)

  • Performance Over One-Year: -0.4%
  • Expense Ratio: 0.18%
  • Annual Dividend Yield: 1.33%
  • Three-Month Average Daily Volume: 77,390
  • Assets Under Management: $388.1 million
  • Inception Date: Sept. 1, 2015
  • Issuer: BlackRock Financial Management

IBMK tracks the S&P AMT-Free Municipal Series Dec 2022 Index, an index composed of investment-grade U.S. muni bonds maturing between Dec. 31, 2021 and Dec. 2, 2022. The ETF's goal is tax-exempt income and to manage interest rate risk. More than 27% of holdings are state-backed bonds, followed by local tax-backed bonds and prerefund/escrow bonds. The fund holds bonds issued by nearly every U.S. state, with California and Texas getting the largest allocations. The top holdings of IBMK include bonds issued by the San Diego County Regional Transportation Commission; the University of Texas; and the Massachusetts State Health and Educational Facilities Authority.

Invesco BulletShares 2022 Municipal Bond ETF (BSMM)

  • Performance Over One-Year: -0.5%
  • Expense Ratio: 0.18%
  • Annual Dividend Yield: 0.38%
  • Three-Month Average Daily Volume: 22,344
  • Assets Under Management: $73.2 million
  • Inception Date: Sept. 25, 2019
  • Issuer: Invesco

BSMM tracks the Invesco BulletShares USD Municipal Bond 2022 Index. The index aims to measure the performance of a portfolio of U.S. dollar-denominated municipal bonds with effective maturities in 2022. The bonds are issued by US state, state agencies, or local governments. As BSMM focuses on bonds with maturities in 2022, the fund will terminate by approximately Dec. 15, 2022. BulletShares funds are unique in that they distribute the principal back to investors when the scheduled maturity date is reached. This helps investors looking to lock in a fixed coupon while also enjoying the diversification possible through an ETF. The top holdings of BSMM include bonds issued by the San Diego County Water Authority; the Colorado Health Facilities Authority; and the city of New York, NY.

The comments, opinions, and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or adopt any investment strategy. While we believe the information provided herein is reliable, we do not warrant its accuracy or completeness. The views and strategies described in our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions, and analyses contained within our content are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment, or strategy.

Article Sources

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  1. Bloomberg. "Muni Bonds Are Down So Much That They’re Buys Again."

  2. YCharts. “Financial Data.”

  3. ETF Database. “ETF Screener.”

  4. Invesco. "PVI - Invesco VRDO Tax-Free ETF."

  5. ETF Database. "PVI: Invesco VRDO Tax-Free ETF."

  6. iShares. "iShares iBonds Dec 2022 Term Muni Bond ETF."

  7. ETF Database. "IBMK: iShares iBonds Dec 2022 Term Muni Bond ETF."

  8. Invesco. "Invesco BulletShares 2022 Municipal Bond ETF."

  9. ETF Database. "BSMM: Invesco BulletShares 2022 Municipal Bond ETF."

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