Big Reasons to Consider Muni Bond ETFs

Municipal bonds 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.

Importantly, recent changes to U.S. tax laws do not diminish the allure of muni bonds for income investors. Options to consider among municipal bond ETFs include the VanEck Vectors AMT-Free Intermediate Municipal Index ETF (NYSEArca: ITM).

“Over the last seven years or so we have seen significant increases in the holdings of municipal bonds by both banks and insurance companies,” said VanEck in a research note. “Within the insurance industry itself, while bond purchases by property and casualty (“P&C”) companies have diminished, those by life insurers have increased. Although, with a reduction in the corporate tax rate to 21%, we may now see some reduction in demand from banks, whether the same holds true for life insurance companies remains to be seen.”

The $1.8 billion ITM, which is over a decade old, tracks the Bloomberg Barclays AMT-Free Intermediate Continuous Municipal Index. ITM holds over 3,400 municipal bonds and has a 30-day SEC yield of 2.27%.

Looking ahead, the muni market is entering a reinvestment season that could bolster the market, with three consecutive months of significant reinvestment demand generated by coupons, maturities and calls ahead.