Nearly $20 billion has gone into municipal fixed-income ETFs so far this year, with retail and institutional investors being drawn in by the vehicles’ cost and liquidity advantages.
Municipal bond exchange-traded funds drew more than double the amount of cash this year compared to traditional mutual funds focused on the asset class, highlighting the growing popularity of ETFs as an investment vehicle in the space.
Year-to-date, muni ETFs have nabbed around $19.6 billion in net inflows, compared to $8 billion for mutual funds, according to data compiled by CreditSights Inc. The difference was particularly stark in August, when investors sent more than $4.5 billion into ETFs, while net inflows for mutual funds were negative, the firm’s data showed.
Demand for municipal-bond ETFs has grown steadily since their introduction in 2007. Unlike actively managed funds, municipal bond ETFs are generally less expensive to run, thanks to index-based strategies and lower trading costs. That has contributed to their popularity with retail investors, especially younger ones, industry participants said.
“Muni ETFs are punching above their weight,” Steve McFee, senior portfolio manager at Vanguard, who oversees the firm’s core tax-exempt bond ETF, said in an email. “ETFs are the preferred vehicle for new generations of investors.”
Read more: Vanguard is joining the active muni ETF fray
Patrick Luby, head of municipal strategy at CreditSights, attributes the ETF boom to a variety of drivers. One is the potential for diversification: For example, ETFs give individual investors a cost-effective way to add high-yield muni exposure to a portfolio of bonds, he said.
Institutional investors, meanwhile, are increasingly willing to use ETFs as a way to diversify liquidity risk in bond portfolios, Luby added.
He also cites a generational shift in the municipal bond market.
“For younger investors who are in accumulation mode, it is very easy to establish a position in an ETF and add to it as additional money gets allocated into fixed income,” he said.