Municipal bond exchange-traded funds (ETFs) provide investors with diversified access to the municipal bond market. In addition to the usual muni-bond advantages of tax-free monthly income and returns, these ETFs generally provide broad exposure to bonds issued by various states as well. 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. Their risk might be heightened by the coronavirus pandemic, which is placing enormous financial strain on state and municipal budgets. This may make it harder for many of these entities to pay their debts.

There are 30 funds in the municipal bond ETF universe, not including leveraged and inverse funds as well as those with under $50 million in assets under management (AUM). Municipal bonds as measured by the S&P Municipal Bond Index have dramatically underperformed the broader market in the past year. As of August 14, 2020, this Index has a 1-year trailing total return of 3.7% as compared with 19.5% for the S&P 500. 

Key Takeaways

  • Municipal bonds dramatically underperformed the broader market in the past year.
  • The ETFs with the best 1-year trailing total returns are MMIN, BAB, and MMIT.
  • The top holdings of these ETFs are municipal bonds for Cook County, Illinois; Allegheny County, Pennsylvania; and Will County, Illinois.

The best municipal bond ETF for Q4 2020 is the IQ MacKay Shields Municipal Insured ETF (MMIN). Below, we take a closer look at the top 3 municipal bond ETFs as measured by 1-year trailing total returns. Aside from the performance figures above, all data are as of August 18, 2020.

IQ MacKay Shields Municipal Insured ETF (MMIN)

  • 1-Year Trailing Total Returns: 5.9%
  • Expense Ratio: 0.31%
  • Annual Dividend Yield: 2.68%
  • 3-Month Average Daily Volume: 68,746
  • Assets Under Management: $130.2 million
  • Inception Date: October 18, 2017
  • Issuing Company: IndexIQ

MMIN primarily invests in investment-grade municipal bonds that are covered by an insurance policy guaranteeing principal and interest payments. This fund is actively managed in order to best capitalize on the fragmented nature of the insured municipal bond market. MMIN's top holdings include municipal bonds for Cook County, Illinois; Phenix City, Alabama; and New Haven, Connecticut.

Invesco Taxable Municipal Bond ETF (BAB)

  • 1-Year Trailing Total Returns: 4.6%
  • Expense Ratio: 0.28%
  • Annual Dividend Yield: 3.37%
  • 3-Month Average Daily Volume: 468,594
  • Assets Under Management: $2.0 billion
  • Inception Date: November 17, 2009
  • Issuing Company: Invesco

BAB focuses on the U.S. dollar-denominated Build America Bonds that were issued by U.S. states, territories, and their subdivisions under the 2009 Recovery and Reinvestment Act. Unlike most municipal bonds, Build America Bonds are taxable securities. The fund tracks the BofA Merrill Lynch Build America Bond Index, and its top holdings include bonds for Allegheny County, Pennsylvania; the state of California; and the University of California system.

IQ MacKay Shields Municipal Intermediate ETF (MMIT)

  • 1-Year Trailing Total Returns: 4.3%
  • Expense Ratio: 0.31%
  • Annual Dividend Yield: 4.00%
  • 3-Month Average Daily Volume: 6,234
  • Assets Under Management: $61.1 million
  • Inception Date: October 18, 2017
  • Issuing Company: IndexIQ

Like MMIN above, MMIT focuses on investment-grade municipal bonds through an actively managed strategy. MMIT generally maintains a dollar-weighted average duration of 3 to 10 years. The top holdings for this fund include municipal bonds for Will County, Illinois; the state of New Jersey; and Birmingham, Alabama.