Are municipal bonds the next growth spot within the fixed-income exchange traded funds (ETFs) area?

In the last year, the fixed-income ETF market has ballooned. In 2007, there were fewer than 12 such funds. Today, there are 58. Municipal bond funds have expanded their ranks, as well, and several providers now offer them.

Jesse Emspak for Investor’s Business Daily reports that muni-bond ETFs are still a small portion of total ETF assets, making up about $1.2 billion of the $636 billion total. Analysts say that the growth will be in single-state munis with varying durations. Tax treatment of munis is different from state to state, giving more incentive to offer more states and offer tax-free returns to more investors.

Vallejo, California’s, recent bankruptcy shows some of the risks of municipal bonds, however. Even though they’re among the safest investments one can make, there’s still a risk of default.

Among the many municipal bond ETFs available are:

• PowerShares Insured National Municipal Bond Portfolio (PZA): 4.19% yield, down 2.3% year-to-date
• iShares National Municipal Bond Fund (MUB): 3.39% yield, up 0.5% year-to-date
• SPDR Lehman Short Term Municipal Bond (SHM): 2.71% yield, up 2.1% year-to-date
• Market Vectors-Lehman Brothers AMT-Free Short Municipal Index (SMB): 2.7% yield, up 0.4% since Feb. 28 inception