Municipal bonds and related ETFs aren’t the most adventurous fixed income assets. That’s usually why income investors, including retirees, embrace the asset class. With interest rates declining, enthusiasm for muni bond ETFs could be reborn.
That’s one indication that now could be an appropriate time examine ETFs, including the ALPS Intermediate Municipal Bond ETF (MNBD). However, the tax advantages offered by municipal bonds are present regardless of interest rate fluctuations. That can add to MNBD’s allure for investors in higher tax brackets.
Yes, municipal debt, including the bonds residing in MNBD, typically sport lower interest payments than taxable bonds. That’s because muni coupons are often exempt from state and local taxes. Income investors in high-tax states find this corner of the bond market attractive. However, that’s not the end of municipal bonds’ benefits.
MNBD Has More Positive Attributes
Investors can easily purchase individual municipal bonds’. However, that can be burdensome. This is one of the largest segments of the bond market with a dizzying array of choices. That underscores the utility of ETFs such as MNBD.
“Based on research from Nasdaq, there are more than 80,000 municipal issuers, and more than 1.5 million municipal bonds have been issued. It can be difficult for individual investors to navigate this market given its size, complexity, and lack of liquidity. Trading costs can be prohibitive, as well. Bid-ask spreads reportedly range between 1% and 4%, and one financial writer found the average spread for holdings he was trying to sell was about 2.85%,” noted Morningstar.
Specific to this muni bond ETF, the MNBD is actively managed. Active managers can spread bets across a variety of municipal subgroups. They also have the flexibility to react more rapidly to changes in credit quality and interest rates.
Additional Upsides for MNBD
Speaking of interest rates, muni bonds are like any other segment of the bond market in that they often benefit from lower interest rates. That’s something to consider with regard to MNBD. That’s because Fed funds futures imply another 100 basis points worth of rate cuts by the second quarter of 2025.
“Like all bonds, municipal bonds fare best during periods of falling interest rates, such as the period that prevailed from 1981 through 2021. Municipal bonds have some performance quirks, though. Because broader economic trends take a while to trickle down to municipal finances, munis sometimes underperform a year or two after recessions, as they did in 1991, 2001, and 2010,” added Morningstar.
vettafi.com is owned by VettaFi LLC (“VettaFi”). VettaFi is the index provider for MNBD, for which it receives an index licensing fee. However, MNBD is not issued, sponsored, endorsed, or sold by VettaFi. VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of MNBD.
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