Rising supply is not always coupled with increasing demand, but both dynamics are currently at play for municipal bonds and that is providing a boost to municipal bond exchange traded funds, such as the iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB), the largest muni-related ETF; SPDR Nuveen Barclays Short Term Municipal Bond ETF (NYSEArca: SHM) and the VanEck Vectors Intermediate Municipal Index ETF (NYSEArca: ITM).
Since muni bond interest is exempt from federal taxes, muni ETFs are a good way for investors seeking tax-exempt income, especially those in higher tax brackets. Due to its tax-exempt status, the asset category is also best utilized in taxable accounts.
Related: Low Yields Haven’t Deterred Muni Bond ETF Investors
The tax-exempt status also creates high demand for municipal bonds. Consequently, the perceived bond yields are typically lower than their taxable counterparts.
According to Lipper data, muni bond funds had over $632 billion in assets as of June 1, a record high, after investors funneled a net $22.5 billion into muni-related funds in 2016, the best start to a year since 2009, the Wall Street Journal reports. In contrast, investors yanked $40 billion from equity funds this year.
[related_stories]“Foreign investors have continued to increase their holdings of municipal debt, along with other U.S. asset classes. While not of a size to heavily influence pricing in the $3.7 trillion municipal market, there is clearly a trend. In fact, municipal holdings are about double the level they were in peak pre-recession 2007. Following introduction of the taxable Build America Bond program in 2009 and 2010, foreign investor interest jumped and has continued to grow,” reports Amey Stone for Barron’s, citing Wells Fargo.
The increased flows into the munis market is attributed to ongoing concerns about the slow pace of global growth and prospects of an extended low interest-rate environment, especially after the recent disappointing jobs report.
Moreover, low and even negative yields on global government bonds have made U.S. assets, including munis, increasingly more appealing relative to other fixed-income assets. For example, foreign investors have increased the amount of municipal debt they hold by 44% to $85 billion from 2009 through 2015, according to the Federal Reserve.
Related: Manage Volatility, Generate Income with Muni Bond ETFs
“Mutual fund flows jumped by nearly $3 billion, reports BofA Merrill Lynch Global Research. Meantime, issuance in June through the ninth was $18.4 billion, up by 46.3% compared to the same period last year, analysts report,” adds Barron’s.
For more information on the munis market, visit our municipal bonds category.
iShares National AMT-Free Muni Bond ETF
