The firm plans to launch seven newly created ETFs to house the bulk of the assets, while the remaining mutual fund will be merged into an existing ETF.
Municipal bond mutual funds have seen heavy outflows of late as the U.S. Federal Reserve is widely expected to raise interest rates this year.
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Bond prices typically drop when hotter-than-expected inflation or robust economic data suggest the central bank may raise rates or delay cuts. Retail investors often react sharply to this volatility, withdrawing cash from mutual funds during periods of rising rates or market uncertainty.
However, demand for ETFs in the space have remained strong as investors choose tax effectiveness, flexibility and active management on their investments through such vehicles during uncertain times.
“The appetite for actively managed municipal ETFs is growing, and we believe the potential conversions will allow our municipal investment team to offer ETF solutions that span the entire municipal yield curve and credit spectrum in a structure that offers transparency and greater accessibility for investors,” said Ally Wallace, global head of ETFs at Morgan Stanley investment management.While the underlying municipal bond market remains unaffected, Morgan Stanley’s conversions act as a defensive measure to retain client assets. By adopting the ETF wrapper, the company aims to prevent cost-conscious investors from shifting their capital to rival exchange-traded funds that offer similar strategies.
The eight municipal mutual funds slated for conversion hold four- or five-star ratings from Morningstar and have track records of more than 15 years, Morgan Stanley said.
Since launching in 2023, Morgan Stanley investment management’s suite of ETFs and products has grown to encompass 22 offerings with more than $16 billion in assets under management.