In an extended low-yield environment, municipal bonds and related ETFs have continued to perform, attracting billions in new inflows this year.
The iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB) is the largest municipal bond ETF.
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.
Related: Manage Volatility, Generate Income with Muni Bond ETFs
However, increasing speculation that the Federal Reserve is poised to raise interest rates before the end of the year has been weighing on yield-generating asset classes, including muni bonds. MUB has declined 2% in recent weeks.
“A 2% decline may not seem like much from a relative sense when viewed against the volatility in long-term Treasuries, high yield debt, or even stocks. However, this decline represents roughly half of one year’s average annual gain and may be a signal that this sector is due for a sharper correction,” reports ETF Daily News.
[related_stories]Munis also help diversify fixed-income portfolios. Investors who typically follow the Barclays U.S. Aggregate Bond Index will not have municipal bond exposure, so a muni bond ETF can complement core fixed-income positions.