Investors Turn to Muni ETFs Amid Strong Returns | ETF Trends

Municipal bonds posted strong total returns in Q1 amid the collapse of Silicon Valley Bank and the subsequent banking crisis driving investors to seek quality, stable assets. In Q1, the Bloomberg Municipal Bond Index and the Bloomberg High Yield Municipal Bond Index returned 2.78% and 2.73%, respectively.

Bond yields also increased after economic data released in February showed a tighter-than-expected labor market and persistently high inflation. The banking crisis led Wall Street analysts’ general outlook to lower inflation and the Federal Reserve easing up on its monetary tightening.

For investors looking to get into muni bonds, Vanguard offers the Vanguard Tax-Exempt Bond ETF (VTEB) and the Vanguard Short-Term Tax-Exempt Bond ETF (VTES).

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. This index includes municipal bonds from issuers that are primarily state or local governments or agencies whose interests are exempt from U.S. federal income taxes and the federal alternative minimum tax (AMT).

VTEB carries an expense ratio of just 5 basis points.

See more: “Vanguard’s Jackson and Johnson on Indexed Muni Demand

Meanwhile, VTES, which was launched in March, tracks the S&P 0-7 Year AMT-Free Muni Bond Index and predominantly invests in short-term investment-grade municipal bonds. With an expense ratio of just 0.07%, it’s markedly cheaper than most active muni mutual funds.

Jeff Johnson, head of fixed income product at Vanguard, recently told VettaFi that he is seeing an increased appetite for muni ETFs.

“We’ve seen growing demand for fixed income ETFs in general, but within fixed income, there’s been particular excitement and greater demand for munis,” Johnson said. “More and more investors who are getting comfortable with indexing in fixed income and who are gravitating towards ETFs are finding a need for this type of product in this space, which is really crucial for a lot of different types of investors who are looking to maximize tax efficiency.”

And it’s not just muni ETFs that are piquing investor interest. The popularity of fixed income ETFs across the board is expected to grow. A survey conducted by PwC shows that fund managers believe fixed income ETF products will see increased demand in the next few years.

“While traditional passive equity products remain the largest segment of the ETF market and respondents expect that demand from investors for these products will continue to be significant, fixed income ETFs are expected to continue their strong growth rates, with 69% of U.S. respondents and at least 60% in the other regions expecting significant demand over the next two to three years,” said the report on the survey results.

For more news, information, and analysis, visit the Fixed Income Channel.