Muni Bond ETFs & Impact on Underlying Liquidity

To put the municipal bond ETF market in perspective, there are 43 munis-related bond ETFs on the market with $30.97 billion in assets under management, according to XTF data. In contrast, there are 340 bond ETFs with $568.8 billion in assets and there are 2,140 U.S.-listed ETFs in the overall market with $3.5 trillion in assets under management. When compared to the broader market, the municipal bond ETF segment still has a long ways to go or at least has a lot more room to run.

“The growth of the municipal bond and other fixed-income ETF markets offers a new tool for investors and market participants, beyond that which can be accessed directly in the over-the-counter bond market. However, it should be noted that the ETF structure itself remains dependent on the liquidity of the underlying bond market,” MSRB said.

Related: Why the U.S. Debt Problem is Getting Worse

ETFs depend on the liquidity of their underlying markets. If the underlying bond market liquidity becomes impaired, then the innate ETF creation and redemption process could also be strained, making it harder for Authorized Participants or market makers to efficiently create or redeem shares and keep the price of an ETF inline wit its underlying value.

For more information on Fixed Income ETFs, visit the ETF Trends Fixed Income Channel.