Muni Bond ETFs Attracting Big Inflows, Despite Low Yields

high-yieldThe amount of money flowing into municipal bond ETFs this year has already overtaken last year’s total, as investors seek a combination of yield and safety they can’t find anywhere else.


Bond market returns have been helped of course by the continuing decline in yields around the world, which have pushed bond prices higher.

In the municipal bond market—which is dominated by income-seeking individual investors—declining yields have historically sent buyers to the sidelines, but this year, investors have been adding significant amounts of new money to the muni market.

Low interest rates and high demand have pushed many interest rates — even on riskier municipal debt — into historically low ranges. Still, there are very few places to park your money and earn more than 3% these days:

Three of the top 12 ETFs rank high in dividend income: The VanEck Vectors High-Yield Municipal Index ETF (HYD | C-59), the SPDR Nuveen S&P High Yield Municipal Bond ETF (HYMB | C-59) and the PowerShares Build America Bond Portfolio (BAB | B-61) all have a dividend yield higher than 4%. (BAB invests in federally taxable Build America Bonds, making it potentially appropriate for tax-deferred and tax-exempt accounts.)

While HYD and HYMB have generated high levels of dividend income and have been inversely correlated to the SPDR S&P 500 ETF Trust (SPY | A-97), there are other muni ETFs that have been better portfolio diversifiers.

Yield-seeking investors should pay attention to these trends as we progress through a very unique fixed income market. Should the Fed increase rates this year as BlackRock predicts, we’ll likely see a big price cut in many of these ETFs, whose yields won’t look quite as good anymore.

The iShares National Muni Bond ETF (NYSE:MUB), which is the largest muni ETF with over $7.4 billion in net assets, was up slights on Thursday afternoon to $113.34 per share. MUB has gained 2.38% year-to-date, which is about half of what the S&P 500 has returned in the same period.


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