More Fixed-Income Investors Could Seek Out Municipal Bond ETFs in 2020 | ETF Trends

Investors can still look into municipal bonds and related exchange traded funds as a way to diversify a traditional fixed-income portfolio mix.

For instance, bond investors have enhanced their fixed-income portfolios with tax-free debt exposure through options like the Vanguard Tax-Exempt Bond ETF (NYSEArca: VTEB) and iShares National Muni Bond ETF (NYSEArca: MUB). VTEB tracks the Standard & Poor’s National AMT-Free Municipal Bond Index, which measures the performance of the investment-grade segment of the U.S. municipal bond market. MUB seeks to track the investment results of the S&P National AMT-Free Municipal Bond Index, which also measures the performance of the investment-grade segment of the U.S. municipal bond market.

High-income households that have been looking for tax relief drove record inflows into muni-bond mutual funds last year, helping the S&P Municipal Bond Index rise 7.3% during the 12 months ended December 27, the Wall Street Journal reports.

As demand for munis increased over the past year, mutual and exchange-traded funds attracted an unprecedented $93.2 billion in net inflows over 2019 ended December 24, along with an impressive $19.3 billion going to high-yield funds, according to Refinitiv data.

“Basically all of that money has driven up prices,” Nicholos Venditti, a portfolio manager at Thornburg Investment Management, told the WSJ.

Looking ahead toward 2020, some analysts believe muni-bond funds will continue that growth. Vikram Rai, head of municipal strategy at Citigroup, believed the muni funds will continue to add another $70 billion in 2020.

Strong fundamentals may support the municipal bond market outlook. Along with investor demand, a lack of issuance from cities and states has helped support prices. After a decade of tight government budgets and new limitations on borrowing, tax-exempt debt outstanding slipped in the $4 trillion bond market.

Municipal borrowers were restricted by the 2017 tax overhaul from enjoying the tax exemption for certain refinancings, so they were forced instead to sell taxable debt, doubling last year’s taxable issuance to $65 billion and diminishing the amount of tax-exempt bonds in the market.

With expectations of a lower-for-longer rate environment, more investors are willing to pay up for muni bond exposure.

“The market is shrinking against really strong demand,” David Hammer, head of municipal bond portfolio management at Pacific Investment Management Co., told the WSJ.

PIMCO also offers its own actively managed PIMCO Intermediate Municipal Bond ETF (NYSEArca: MUNI) to help investors gain exposure to this fixed-income segment.

For more information on the munis market, visit our municipal bonds category.