By Christine Idzelis
‘I think you’re going to see more and more of the muni space moving toward ETFs,’ says Morgan Stanley’s Craig Brandon
Hello! For this week’s ETF Wrap, Morgan Stanley and BlackRock provide some perspective on investing in the municipal-bond market.
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The number of exchange-traded funds focused on the municipal-bond market appears on the verge of expanding, providing investors more ways to find exposure to tax-exempt debt.
“The ETF business in munis is in the early innings,” said Craig Brandon, co-head of municipals at Morgan Stanley Investment Management, in a phone interview. “I think you’re going to see more and more of the muni space moving toward ETFs.”
The $4 trillion muni market attracts investors looking for tax-exempt income, particularly those who are “very wealthy,” according to Brandon. Morgan Stanley, which has two muni ETFs, including the Eaton Vance Short Duration Municipal Income ETF EVSM and Eaton Vance Intermediate Municipal Income ETF EVIM, is planning to launch a high-yield muni ETF, he said.
BlackRock announced Feb. 10 it converted its mutual fund that invests in high-yield municipal bonds into an exchange-traded fund, the iShares High Yield Muni Active ETF HIMU. The firm said the actively managed ETF “aims to maximize federal tax-exempt current income and capital appreciation by investing in high-yield municipal securities across a variety of sectors.”
Meanwhile, Nuveen said late last month that it launched two actively managed ETFs targeting municipal bonds, the Nuveen High Yield Municipal Income ETF NHYM and the Nuveen Municipal Income ETF NUMI. And Vanguard also recently listed active ETFs targeting muni bonds. In late November, the firm announced two such funds, the Vanguard Short Duration Tax-Exempt Bond ETF VSDM and Vanguard Core Tax-Exempt Bond ETF VCRM.
“You’re more likely to buy munis if you’re in the 37% tax bracket,” said Brandon. “The higher the tax bracket you’re in, the more valuable the muni exemption is.”
BlackRock’s muni outlook for 2025 estimated that the tax-equivalent yield for the high-yield segment of the market was slightly more than 9%.
BlackRock has several muni ETFs, including both actively managed and index-tracking funds.
For example, the iShares National Muni Bond ETF MUB, iShares Short-Term National Muni Bond ETF SUB and iShares New York Muni Bond ETF NYF are among BlackRock’s index funds. The firm’s active lineup includes such funds as the iShares Short-Term California Muni Active ETF CALI and iShares Intermediate Muni Income Active ETF INMU.
“Muni credit in general is very strong,” said Pat Haskell, head of the municipal-bond group at BlackRock, in a phone interview. While high-yield muni bonds are riskier than investment-grade, investors may “pick up” incremental yield in a market that now has low default rates, he said.
“Our job is to make sure we get the security selection right,” actively managing the iShares High Yield Muni Active ETF with the aim of outperforming the marketplace, Haskell said. He said BlackRock is staying “vigilant” monitoring risks that include natural disasters such as wildfires.
For example, the firm has developed “a couple of different AI tools,” one of which helps analyze climate-related risks and disasters, according to Haskell. He said the firm also uses AI to track economic activity across the U.S, including by county and Zip code, to analyze things like how robust a tax base is in a particular area to support an investment in a muni bond.
“Municipal issuers have a strong track record of recovering from natural disasters without impairments to bondholders,” Wells Fargo Investment Institute said in a note last month. “No state or local government whose bonds are rated by Moody’s has defaulted because of a natural disaster.”
Meanwhile, the muni market faces risk amid talk in Washington about the tax exemption possibly being eliminated, as the Trump administration looks for ways to reduce the U.S. deficit – but there’s a “very low probability” that it would be repealed, according to Haskell.
“One of the few things that polls well on both sides of the aisle is infrastructure,” he said. “This is the market that we fund infrastructure with in this country.”
More generally, inflation and related interest-rate volatility are a risk to the muni market, said Haskell, as with the broader fixed-income market.
As usual, here’s your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.
The good…
Top performers %Performance Invesco China Technology ETF 9.1 KraneShares CSI China Internet ETF 7.9 iShares MSCI China ETF 7.0 iShares China Large-cap ETF 7.0 United States Natural Gas Fund LP 5.6 Source: FactSet data. Start date: Feb. 5. End date: Feb 12. Excludes ETNs and leveraged products. Includes NYSE-, Nasdaq- and Cboe-traded ETFs of $500 million or greate
…and the bad
Bottom performers %Performance YieldMax TSLA Option Income Strategy ETF -9.9 YieldMax COIN Option Income Strategy ETF -7.5 SPDR S&P Semiconductor ETF -6.1 iShares MSCI India Small Cap ETF -5.9 Global X MLP ETF -5.3 Source: FactSet data
New ETFs
— GMO said Feb. 13 that it launched the GMO Beyond China ETF BCHI, an actively managed fund “designed to capitalize on the significant shift in global supply chains away from China.”
— Vanguard announced on Feb. 11 the launch of two fixed-income ETFs, the Vanguard Ultra-Short Treasury ETF VGUS and Vanguard 0-3 Month Treasury Bill ETF VBIL.
Weekly ETF reads
— This gold ETF jumps to record after its longest winning streak since 2020 amid tariff concerns (MarketWatch)
— Trump wants to manage your investment portfolio (Wall Street Journal)
— ETF industry braces for winds of change under Donald Trump (Financial Times)
— SEC X account hack over bitcoin ETF post leads to guilty plea (Bloomberg)
-Christine Idzelis
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02-13-25 2013ET
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