Muni Bond ETFs Are Beating Active Mutual Funds

Bonds issued by Puerto Rico are exempt from federal, state, and local income taxes for individual investors.  In September 2015, Standard & Poor’s Ratings Services downgraded Puerto Rico-backed debt to ‘CC,’ citing that the bonds are highly vulnerable to nonpayment.

A separate difference between municipal bond ETFs and mutual funds is that ETFs trade on an exchange, allowing investors the liquidity to make intra-day trades.  Yet, at the same S&P Dow Jones Indices’ forum, a panelist reminded attendees that municipal bond ETFs net asset values (NAVs) are a best estimate.  Unlike Treasury bonds, it is rare for muni bonds to trade on a daily basis.  As such, according to our research, muni ETFs that hold these securities can, at times, trade at relatively wider premiums or discounts compared with NAVs.

S&P Capital IQ has researched 33 municipal bond ETFs, 22 of which have price/NAV premiums or discounts greater than 10 bps.  Meanwhile, just two of the 22 U.S. Treasury ETFs trade as widely relative to their net asset value.