Muni bond ETFs gathered $6.3 billion in the first nine months of 2023. However, a healthy $1.4 billion flowed in during September alone. According to Columbia Threadneedle, there is good reason to focus on the asset category.
“We’re getting closer to the end of the Fed tightening cycle," explained Catherine Stienstra, head of municipal investments at Columbia Threadneedle, in an exclusive interview at VettaFi’s NY office. “Historically, the municipal market outperforms when rates are stable or are heading lower.
Muni Bond Default Rates Are Low
Stienstra added that municipal bond yields are attractive on a tax-equivalent basis and the default rates are lower than corporate bond equivalents. Indeed, according to Moody’s Investment Service, speculative-grade municipal bonds have had a 6.8% default rate in the last 32 years, significantly lower than the 30% rate for similarly rated global corporate bonds. Meanwhile, investment-grade municipal bonds had a miniscule 0.1% default rate, far less than the 2.2.% for corporate bonds equivalents.
Stienstra has 35 years of investment experience and is a portfolio manager for the actively managed Columbia Strategic Municipal Income mutual fund as well as the index-based (MUST ).
MUST Is Not a Traditional Index ETF
MUST launched in 2018 as the first strategic beta municipal bond ETF. Many traditional index peers are constructed based on debt issuance and only hold investment-grade bonds. MUST is different; it was built leveraging the expertise of Stienstra and her active management colleagues.
The portfolio managers made decisions at the onset to include or exclude sectors and states seeking a more balanced maturity profile, generating enhanced income and relative value. For example, according to Stienstra, MUST has no exposure to bonds issued by California. Yields for bonds from this state tend to be lower due to the higher tax rate. In contrast, MUST’s exposure to states like Illinois and Texas is higher.
From an income-enhancing perspective, the fund owns some bonds with speculative-grade ratings. Recently, while 66% of assets were in securities rated AA- or A-, there was also 8% in bonds rated BB- and less than 1% in bonds rated B-. From a sector perspective, MUST has relatively high weightings in hospital and water & sewer bonds, and less in general obligation bonds than other municipal bond ETFs.
While this sounds more like an active strategy, MUST tracks an index and is priced accordingly. The nearly $350 million ETF has a 0.23% expense ratio. Thus far in 2023, MUST gathered $80 million, but we think the ETF could garner more attention heading into 2024.
Upcoming VettaFi Income Strategy Symposium
On October 27, the VettaFi Income Strategy Symposium will take place. Mark Zeitoun, head of strategic beta at Columbia Threadneedle, will be speaking to me alongside Courtney Wolf, a fixed income portfolio manager at Capital Group, about municipal bond ETFs. We are bringing industry experts to talk about a range of income strategies, including core taxable bonds, high yield corporate bonds, covered calls, and municipals. Register today to join us.
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