The U.S. municipal bond market represents a $3.8 trillion pie and smart beta exchange-traded fund (ETF) strategies are looking for a slice as Columbia Threadneedle Investments has filed for an ETF dubbed the Columbia Multi-Sector Municipal Income ETF that will incorporate rules-based and strategic beta strategies.
Columbia already boasts an ETF roster that utilizes smart beta strategies for emerging markets, equity income and fixed income. However, the municipal bond market has been relatively untouched as shown in the pie chart below.
However, once Columbia sets its footprint on the municipal bond market, other ETFs using smart beta strategies are likely to follow, according to Marc Zeitoun, head of strategic beta at Columbia Threadneedle. By his estimation, the shift to benchmarking and passive investing in the municipal bond market is trailing the equity market by about six years.
“This is a trend that will likely occur in the municipal world,” said Zeitoun. “It’s happening in every other asset class.
Columbia’s foray into a municipal bond market that typically relies on passive investment strategies will be a first in terms of using a smart beta strategy. These strategies can include multi-factor investments that help combine uncorrelated investment styles to smooth out volatility.
Since there are multiple uncorrelated factors at play, it helps guarantee that at least one factor will help support the portfolio during times of distress. Moreover, a multi-factor ETF removes the need for investors to babysit a portfolio and switch between factors in an attempt to time market moves.
In terms of the Columbia Multi-Sector Municipal Income ETF, the fund would target debt market factors exclusive to the bond markets like duration, yield, quality, maturity, liquidity, and sensitivity to interest rates. By adhering to a rules-based strategy, the ETF could ferret out bonds that are not ripe for investment.
The ETF will corner various areas of the municipal bond market, such as investment-grade debt issues in revenue bonds, health care, general-obligation bonds, and high-yield debt. It remains to be seen whether this smart beta approach will catch on with other firms looking to offer ETF products in this space, but market experts do see this as a revolutionary step forward in the municipal bond market.
“It’s evolutionary that we see this happening in the muni bond ETF space,” said Todd Rosenbluth, director of ETF and mutual fund research at CFRA Research.
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For more trends in fixed income, visit the Rising Rates Channel.