There are currently no enhanced or strategic index-based municipal bond ETFs on the market, which may leave a great opportunity for the ETF industry to further develop ahead. The industry is only just beginning to make inroads into the smart beta fixed-income space, with 51 enhanced index-based bond ETFs currently on the market, according to XTF data.
Yield and Market Complexity
Along with its findings on smart beta muni bond ETF demand, the survey found that financial advisors are most concerned about yield and market complexity when investing in muni bonds for their clients.
Around 43% of financial advisors indicated they were concerned with finding the right amount of yield to align with their clients’ goal and preferences, and about 14% revealed concern over the complexity in the muni market post-2008, followed by unintended consequences of benchmark investing at 12%, and an inability to conveniently access all sectors of the muni market at 12%.
“Financial advisors are concerned about yield and market complexity when it comes to allocating client dollars to the muni space. This market has changed significantly in the last ten years, but there are still smart ways to invest in it if you know what to look for,” Catherine Stienstra, Head of Municipal Investments at Columbia Threadneedle, said in a note. “Traditional benchmark indices exclude viable investment options, are debt-weighted and can be over-concentrated in less attractive sectors. This puts advisors in a tough position when they try to balance cost-efficiency with investment opportunity. As passive investing continues to grow, rather than simply accept an imperfect benchmark portfolio, municipal bond investors with a preference for passive solutions should think about adopting a smart beta approach.”