ETFs that invest in municipal bonds have seen very respectable inflows this year as investors comb through fixed-income markets in search of extra yield. Some investors are also using them as a safe haven in place of low-yielding Treasuries while the tax advantages of muni bonds are always a bonus.
“There’s a growing appetite across a wider range of investors given the relative attractiveness and uncertainty over tax policy,” Dan Heckman, senior fixed income strategist with U.S. Bank Wealth Management, tells MarketWatch. “They look at munis as another safe haven outside of Treasurys, and you pick up additional yield and a tax advantage. It’s a good value proposition because yields are still higher in some cases than on Treasurys and in some case corporate bonds.”
Additionally, investors are feeling more comfortable about the credit quality of muni bonds as local governments shore up their finances. Still, San Bernardino over the summer became the third municipality in California to file for bankruptcy. [Buffett Moves Highlight Risks of Muni, High-Yield Bond ETFs]
The largest muni bond ETFs include iShares S&P National AMT-Free Municipal Bond (NYSEArca: MUB), Market Vectors High-Yield Municipal (NYSEArca: HYD), PowerShares Insured National Municipal Bond (NYSEArca: PZA), PowerShares Build America Bond (NYSEArca: BAB), SPDR Barclays Capital Municipal Bond (NYSEArca: TFI) and SPDR Nuveen Barclays Capital Short Term Municipal Bond (NYSEArca: SHM).
Combined, these six muni bond ETFs have gathered inflows of nearly $2 billion so far in 2012. [Tax Break Makes Muni Bond ETF Yields More Attractive]
MUB, the largest muni bond ETF with assets of $3.2 billion, has posted a total return of 9% the past year. So far in 2012, the fund has raked in $549 million of inflows, according to IndexUniverse data. MUB has a 12-month yield of 3%, according to manager BlackRock. [Muni Bond ETFs For Liquidity and Yield]
“The secondary market seems poised for municipal bond prices to move higher. Dealers appear comfortable with current municipal market levels and we have seen increased interest in the shorter end of the curve,” says James Colby, portfolio manager and senior municipal strategist at Market Vectors ETFs. [Muni Bond ETFs: Red Light, Green Light]