Muni Bond ETF Fourth-Quarter Outlook | ETF Trends

Muni index and ETF performance has generally been good this year.

  • Falling yields have contributed to positive returns year-to-date.
  • Through September, municipal mutual funds and ETFs have witnessed 43 consecutive weeks of positive cash inflows.
  • Only recently has supply begun to accelerate and approach the more normalized patterns of the past 10 years.
  • I believe the continued value proposition embedded in municipal yields — nominally higher than those of treasuries — has attracted both individual and institutional buyers.
  • Re-investable cash in the form of “called away” bonds, coupons and maturities has propelled performance through the end of the third quarter and is, in my opinion, likely to continue to drive demand in the fourth quarter.

I believe we can expect continued good performance but with the following two caveats: (1) political risk in the form of potential changes to, or elimination of, the tax-exempt nature of municipal interest, and (2) credit deterioration resulting from weak underlying economics. Either could have an adverse impact on the market. [Muni Bond ETFs: Yield, Safety and Tax Advantages]

James Colby is a portfolio manager and senior municipal strategist at Market Vectors ETFs.