A Smart Beta Municipal Bond ETF Play

Bringing smart beta to the municipal bonds segment, Columbia Threadneedle Investments expanded on its strategic beta ETF lineup with a rules-based approach to muni investing.

On Wednesday, Columbia Threadneedle Investments launched the Columbia Multi-Sector Municipal Income ETF (NYSEArca: MUST), which has a 0.28% expense ratio.

“Today’s municipal market is comprised of nearly $4 trillion in assets spread out among more than one million debt offerings from 80,000 issuers,” Catherine Stienstra, head of municipal bond investments at Columbia Threadneedle Investments and serves as Lead Portfolio Manager of MUST, said in a note. “In the muni space, buying individual bonds or purchasing a debt-weighted benchmarked product doesn’t give investors the diversification they need, nor the ability to manage credit risk transparently and efficiently. We created MUST with the goal of simplifying investors’ municipal bond exposure without compromising their investment objectives.”

The Columbia Multi-Sector Municipal Income ETF tries to reflect the performance of the Beta Advantage Multi-Sector Municipal Bond Index, which is comprised of state or local government debt whose interest is exempt from U.S. federal income tax and follows a rules-based, multi-sector strategic beta approach to measuring the performance of the U.S tax-exempt bond market, according to the fund’s prospectus.

Smart-beta, multi-sector approach

The smart-beta, multi-sector approach is represented by five sectors of the municipal debt market, with a focus on yield, quality, maturity, liquidity, and interest rate sensitivity.

The five sectors include the Municipal Core Revenue Sector at 45%; health care-related debt or the Municipal Health Care Sector at 20%; high quality revenue bonds or the Municipal High Quality Revenue Sector at 15%; general obligation (GO) bonds or the Municipal Core GO Sector at 10%; and high yield debt or the Municipal High Yield Sector at 10%.

“Even though most investors’ current exposure to municipals is through actively managed portfolios or individual bonds, we’ve seen a growing interest in passive products in the municipal space,” Marc Zeitoun, head of strategic beta at Columbia Threadneedle Investments, said in a note. “Given the limitations of existing municipal bond benchmarks, we opted to draw upon our expertise in managing active municipal bond portfolios to build an innovative, strategic beta fund that leverages our best thinking, but in a cost-effective, risk-managed way.”

For more information on new fund products, visit our new ETFs category.