Despite the billions that has flowed into exchange traded funds, the municipal bond ETF space still has plenty of room to grow.

Through September 30, actively managed municipal-debt funds had $573 billion in assets under management, compared to just $20 billion for index funds – the largest active-to-passive difference for eight distinct fund types tracked by Morningstar, reports Ari I. Weinberg for the Wall Street Journal. Additionally, of the passive muni funds available, 85% of assets were in ETFs.

Potentially hinting at the potential growth opportunity in the muni index fund space, Vanguard Group recently launched its municipal bond ETF, the Vanguard Tax-Exempt Bond Index Fund (NYSEArca: VTEB). VTEB tries to reflect the performance of the Standard & Poor’s National AMT-Free Municipal Bond Index, which tracks investment-grade U.S. municipal bonds with at least a BBB- Fitch Rating and an effective duration between five and eight years. The ETF has a cheap 0.12% expense ratio, a 5.7 year duration and a 1.82% 30-day SEC yield. [Vanguard Launches Its First Muni Bond ETF]

Investors in higher marginal tax brackets typically hold muni debt as high-income investors would benefit the most from the state, federal and local tax-exempt status of the interest income generated from municipal bonds.

For example, the iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB), which has a 0.25% expense ratio and a 4.71 year duration, shows a 1.65% 30-day SEC yield or a 2.91% taxable equivalent SEC yield for those in the highest income bracket.

Moreover, many investors have turned to municipal bond funds for exposure since the municipal debt market is not as large or liquid as that of the federal or corporate debt markets.

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