The municipal bond madness continues for fixed income investors who are flocking to these tax-free debt issues via exchange traded funds (ETFs), according to a Financial Advisor article.

As the article noted, “Spurred by low yields and the threat of higher taxes, money is pouring into tax-free municipal bond ETFs, according to new analysis from CFRA, an independent fund research and rating firm. Tax-free muni ETFs took in $16.4 billion in net inflows through Oct. 7, up from $14.6 billion for the entirety of 2020.”

The trillion dollar infrastructure bill, among other initiatives, could also be driving investors to municipal bonds. As mentioned, investors are prepping for higher tax bills come April.

“Some of the drivers of increased demand include the likelihood of higher taxes under the Biden administration encouraging investors to seek tax-free alternatives, the recovery of many municipalities as local economies strengthened and the need for above-average income given low interest rates,” said Todd Rosenbluth, CFRA head of ETF and fund research.

“We also think investors’ growing comfort in the liquidity of fixed income ETFs has helped municipal bond products gain traction,” Rosenbluth said. “Despite representing 6.8% of the fixed income ETF universe, municipal bond ETFs have gathered 11% share of $154 billion of net inflows for the asset category as of Oct. 7.”

An Invesco Muni ETF to Consider

One ETF to consider is the Invesco National AMT-Free Municipal Bond ETF (PZA), which seeks to track the investment results of the ICE BofAML National Long-Term Core Plus Municipal Securities Index. The fund generally will invest at least 80% of its total assets in the components of the index.

The index is composed of U.S. dollar-denominated, tax-exempt municipal debt publicly issued by U.S. states and territories and their political subdivisions in the U.S. domestic market. PZA’s expense ratio comes in at 0.28%.

“This fund tracks an index of municipal bonds, a slice of the bond market that is highly coveted due to its tax features,” an ETF Database analysis said. “These bonds are generally free from federal taxes and in some cases, state and local income taxes as well making these funds crucial components of portfolios for those in high tax brackets.”

“Muni bonds are used by local entities to pay for a variety of services or to make improvements to infrastructure paying for everything from new sewer systems to school renovations and bridge construction as such, they are relatively low risk instruments,” the analysis added further.

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