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, including in their portfolio a variety of states issuing debt securities. 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 coronavirus pandemic 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 approximately 35 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).

The best municipal bond ETF for Q3 2020 is the IQ MacKay Shields Municipal Insured ETF (MMIN). Below, we take a closer look at the top 3 municipal bond ETFs in greater detail. All figures are as of May 17, 2020.

IQ MacKay Shields Municipal Insured ETF (MMIN)

  • Performance over 1-Year: 6.1%
  • Expense Ratio: 0.31%
  • Annual Dividend Yield: 2.84%
  • 3-Month Average Daily Volume: 93,458
  • Assets Under Management: $96.7 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 fragmentary nature of the insured municipal bond market. MMIN's top holdings include municipal bonds for Phenix City, Alabama; Sangamon County, Illinois; and Cook County, Illinois.

SPDR Barclays Capital Municipal Bond ETF (TFI)

  • Performance over 1-Year: 4.5%
  • Expense Ratio: 0.23%
  • Annual Dividend Yield: 2.09%
  • 3-Month Average Daily Volume: 1,352,591
  • Assets Under Management: $3.3 billion
  • Inception Date: September 13, 2007
  • Issuing Company: State Street SPDR

The SPDR Barclays Capital Municipal Bond ETF tracks the Barclays Capital Municipal Managed Money Index. This is an index of municipal bonds with a duration between 1 and 25 years and excluding bonds subject to Alternative Minimum Tax. TFI holds approximately 300 securities and allocates its holdings fairly evenly across its portfolio, ensuring a high level of diversification. After a cash component accounting for 23.1% of total assets, this fund's largest holdings include bonds for the Bay Area Toll Authority in California; the Ohio State Water Development Authority; and Hamilton County, Ohio.

iShares California Muni Bond ETF (CMF)

  • Performance over 1-Year: 4.4%
  • Expense Ratio: 0.25%
  • Annual Dividend Yield: 2.01%
  • 3-Month Average Daily Volume: 290,330
  • Assets Under Management: $1.4 billion
  • Inception Date: October 4, 2007
  • Issuing Company: iShares

CMF is a fund focused on municipal bonds of California issuers and tracks the S&P California AMT-Free Municipal Bond Index and allocates. This is one of the most popular ETFs for investors who want exposure to municipal bonds from California issuers, and offers the greatest depth of holdings among all California muni bond ETFs. After a cash component, the top three holdings for CMF include bonds for the Los Angeles Department of Water and Power; the San Joaquin Hills Transportation Corridor Agency; and the state of California.