Muni Bond Investors Are Interested in Strategic Beta ETF Strategies

As the municipal bond market environment shifts, investors are reluctant to rely on traditional market capitalization-weighted index funds and want to look for more dynamic strategies like smart beta ETFs.

According to a recent Columbia Threadneedle Investments survey of financial advisors, while the majority of respondents favored actively managed investments when establishing municipal bond exposure for clients, interest in a muni bond strategic beta ETF is also strong. Around 55% indicated they would consider investing in a muni bond smart beta ETF or are already invested in such products and would consider others.

“Financial advisors are being pulled in multiple directions as they remain committed to doing what’s best for their clients,” Marc Zeitoun, Head of Strategic Beta at Columbia Threadneedle, said in a note. “The competing priorities of price and preference for active management are a good example of the balancing act they face. Strategic beta ETFs present a great middle ground between ‘best thinking active investment insight’ and passive implementation. It’s no wonder that track record and a firm’s expertise as an active fixed-income manager remain the most important factors when considering strategic beta ETFs.”

There are currently 15 U.S.-listed actively managed municipal bond ETFs on the market, with the First Trust Managed Municipal ETF (NasdaqGM: FMB) and PIMCO Intermediate Municipal Bond ETF (NYSEArca: MUNI) among the largest options available.

Columbia Threadneedle has a smart beta fixed-income ETF, the Columbia Diversified Fixed Income Allocation ETF (NYSEArca: DIAL), which follows a rules-based multi-sector strategic approach to debt market investing. The underlying smart beta index covers six sectors of the debt market, focusing on yield, quality and liquidity. However, it does not include exposure to municipal debt.