[Updated on October 26, 2017 by Jayden Sangha] For fixed-income investors chasing safety, liquidity and comparable returns in today’s environment, there might not be very many options; however, investment pools comprised of several bonds with different maturities, coupons, geographic regions and credit ratings may be the answer for proper risk mitigation.
Historically, investors resorted to mutual funds to maintain proper diversification for their portfolios and generate decent returns. In recent times, as strategies evolved, exchange-traded funds (ETFs) have emerged as strong rivals to the mutual fund space. Bond ETFs, including municipal bond–specific ETFs, have provided diversification similar to mutual funds while being relatively more liquid and cheaper.
In this article, we’ll take a closer look at the best municipal bond ETFs that investors can consider making part of their investment portfolios based on three specific criteria.
Keep our glossary of municipal bond terminologies handy to familiarize yourself with different concepts commonly used by municipal investors.
Top Muni Bond ETFs by Assets
The largest municipal bond ETFs provide investors with a diversified set of investment vehicles with relatively low expenses. Given their lower cost, they are generally a good fit for individual investors with longer time horizons for their investments. All these muni bond ETFs are comprised of various municipal issues with various maturities and credit ratings. The typical risk factors that would otherwise apply to a single debt instrument would also apply to ETFs, which are an eclectic mix of independent debt instruments.
The largest muni bond ETFs, in terms of assets under management, are listed below.
| Ticker | Name | Total Assets (millions) | Expenses |
|---|---|---|---|
| MUB | iShare National AMT-Free Muni Bond ETF | $9,035 | 0.25% |
| SHM | SPDR Barclays Short Term Municipal Bond | $3,521 | 0.20% |
| TFI | SPDR Barclays Capital Municipal Bond ETF | $2,479 | 0.23% |
| HYD | VanEck Vectors High Yield Muni Index ETF | $2,118 | 0.35% |
| ITM | VanECK Vectors AMT-Free Intermediate. Muni Index | $1,727 | 0.24% |
It’s also worth noting that shorter maturities will often be attractive in the rising rate environment, because investors prefer shorter-term maturities to protect their assets from interest rate risk. With the longer maturities, the risk is higher; however, the yield will also be higher to compensate for the risk premiums.
Be sure to visit our Market Activity section to explore recent muni bond trades.
Top Muni Bond ETFs by Cost
Investors with longer time horizons and fixed-income goals often gravitate towards ETFs and other investment instruments that have low management fees. It is important to note that the total fees paid to the management team of an ETF come out of the yield of the ETF, which decreases the net yield paid out to investors. The common investment methodology of any low-cost ETF would be to follow an index and not a specific (i.e. actively managed) strategy.
Here are some of the most cost-effective muni bond–oriented ETFs.
| Ticket Ratio | Name | Total Assets (millions) | Expense |
|---|---|---|---|
| VTEB | Vanguard Tax-Exempt Bond Index ETF | $1,703 | 0.09% |
| IBMI | iShares iBonds Sep 2020 AMT-Free Muni ETF | $227 | 0.18% |
| IBMH | iShares iBonds Sep 2019 Term Muni ETF | $225 | 0.18% |
| IBMG | iShares iBonds Sep 2018 Term Muni ETF | $213 | 0.18% |
| IBMJ | iShares iBonds Sep 2021 Term Muni ETF | $159 | 0.18% |
It is quite evident that the iBond Series of muni bond ETFs offer relatively low expense ratios for investors looking to target muni bonds with certain maturities. Investors can build their own diversified, laddered bond portfolios more easily with these ETFs than with individual muni bonds. Investors executing more advanced strategies may want to consider these ETFs as a low-cost alternative to broader muni ETFs.
Top Muni Bond ETFs by Yield
Investors who aren’t afraid to take on some risk in their portfolios may want to consider high-yield municipal bond ETFs. In exchange for higher credit risk, these bonds reward investors with higher-than-average yields. The built-in diversification of an ETF helps eliminate some of the risks associated with these high yields, but there have been several instances of default within the high yield muni bond space, with the most recent example being that of Puerto Rico bonds.
Some of the highest-yielding muni bond ETFs include:
| Ticker | Name | Annual Dividend Yield | Expense Ratio |
|---|---|---|---|
| XMPT | VanEck Vectors CEF Muni Income ETF | 4.94% | 1.59% |
| HYD | VanEck Vectors High Yield Muni Index ETF | 4.36% | 0.35% |
| MCEF | First Trust Municipal CEF Income Opportunity ETF | 3.79% | 1.91% |
High-yield bonds may offer compelling income for investors, but it’s worth considering the risks before investing. Troubles in high-yield municipal bond markets – like Puerto Rico – can lead to price declines in an entire portfolio. High-yield bonds also tend to be sensitive to rising interest rates, since investors could easily find yield elsewhere without the higher risk. That said, muni bonds as an asset class tend to be relatively safe, which has made these ETFs popular.
Check out the different ways to invest in muni bonds to stay up to date with current investment strategies.
Key Considerations for Investors
As ETFs may seem like the better investment option compared to individual bonds, which lack diversification, or mutual funds, which are relatively more expensive, potential national muni ETF investors must keep the following things in mind:
- ETFs have low expense ratios due to passive portfolio management. In high market volatility or changes in economic conditions, ETF investors will need to stay extra vigilant and make appropriate shifts to their investments to mitigate risks.
- Investors looking to pitch in small amounts of monies to buy ETFs may end up paying far more than the actual ETF expenses. Every trade entails a commission fee, which can pile up with multiple orders.
Be sure to check out this article to remain aware of the due diligence process for evaluating municipal bonds.
The Bottom Line
Municipal bonds are a popular asset class due to their compelling tax advantages. For individual investors, there are many different options depending on their investment objectives, and it’s important to look beyond the most popular ones and consider all the details before deciding.
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