Municipal bond exchange-traded funds (ETFs) provide investors with access to the municipal bond market. In addition to the usual muni bond advantages of tax-free monthly income and returns, these ETFs generally provide a highly diversified exposure, including in their portfolio a variety of states issuing debt securities. All these are rated “investment grade” by Standard and Poor‘s, indicating a low degree of credit risk.
These four funds can be especially good bets for investors’ fixed-income portfolios. All statistics are current as of Oct. 12, 2018.
SPDR Nuveen Barclays Municipal Bond ETF
The SPDR Nuveen Barclays Municipal Bond ETF (TFI) was issued in 2007 by State Street Global Advisors; it’s managed by State Street, with Nuveen Asset Management as sub-advisor. TFI seeks to provide investment results corresponding to the Barclays Municipal Managed Money Index, its benchmark. This benchmark index is designed to track fixed-rate, long-term U.S. municipal bonds with credit ratings of at least Aa3, AA- or AA- by at least two of the following agencies: Moody’s Investors Service, Standard & Poor’s Ratings Services and Fitch, Inc. Additionally, securities comprising this index must have an outstanding par value of $7 million or greater and must be issued as part of a transaction of at least $75 million.
To achieve its investment objective, TFI implements a sampling strategy and may purchase a subset of municipal bonds comprising the index to hold a portfolio of bonds with similar characteristics to its benchmark index. Under normal market conditions, TFI generally invests at least 80% of its total assets in bonds comprising the index.
TFI holds 645 municipal bonds (primarily from California, New York and Texas) and charges a net expense ratio of 0.23%. TFI has an average yield to maturity of 4.42%, an effective duration of 7.17 years, a dividend yield of 2.28% and a tax-equivalent yield of 4.45% (the latter is the yield a taxable bond ETF needs to offer to its investors in the highest marginal federal income tax rate to equal a tax-free fund’s yield). TFI’s tax-free income, low credit risk and moderate degree of interest rate risk make it best-suited for long-term, fixed-income investors seeking both market exposure and a healthy tax-exempt monthly income.
iShares National Muni Bond
The iShares National Muni Bond ETF (MUB) was issued on Sept. 7, 2007, by BlackRock iShares. MUB provides investors with exposure to a diversified portfolio of 2,779 investment-grade, tax-exempt, U.S. dollar-denominated municipal bonds and tax-free monthly income. MUB seeks to provide investment results corresponding to the S&P National AMT-Free Municipal Bond Index, a benchmark that includes bonds issued mainly by states, local governments or government agencies. Municipal bonds included in this index must have a credit rating of BBB- or higher by Standard & Poor’s Ratings Services, BBB- by Fitch Ratings or Baa3 by Moody’s Investors Services.
To track its benchmark, or underlying, index, MUB implements a representative sampling indexing strategy. MUB generally invests at least 90% of its total net assets in municipal bonds comprising its underlying index and may invest a maximum of 10% of its total net assets in derivative securities, cash and cash equivalents. MUB has an expense ratio of 0.07%, significantly down from .25% back in 2015.
MUB has a distribution yield of 2.68%, an average yield to maturity of 2.9%, a tax-equivalent distribution yield of 4.74% and an effective duration of 6.19 years. Based on these characteristics, MUB is best-suited for buy-and-hold investors with an intermediate-term investment horizon, and as a satellite holding in fixed-income portfolios.
VanEck Vectors AMT-Free Intermediate Municipal Index
The VanEck Vectors AMT-Free Intermediate Municipal Index ETF (ITM) was issued on Dec. 4, 2007, by Van Eck Associates. Its custodian bank is the Bank of New York Mellon. ITM seeks to provide investment results with a high correlation to the performance of the Bloomberg Barclays AMT-Free Intermediate Continuous Municipal Index. The fund’s underlying index tracks the performance of U.S. dollar-denominated intermediate-term tax-exempt bonds.
ITM implements an indexing strategy and generally invests at least 80% of its total net assets in municipal bonds comprising its underlying index. Over time, ITM’s adviser expects the fund to have a 0.95 or greater correlation coefficient to the Barclays AMT-Free Intermediate Continuous Municipal Index. ITM charges a net expense ratio of 0.24%. The top three issuers among its holdings are the state of California, the New York City Transitional Finance Authority and Washington State.
ITM has a distribution yield of 2.39%; a tax-equivalent yield of 3.85%; a yield to maturity of 3.47%; and an effective duration of 7.03 years. Based on these characteristics, the fund is best-suited for fixed-income investors in high tax brackets with a moderate-to-high risk tolerance.
Invesco National AMT-Free Municipal Bond
The Invesco National AMT-Free Municipal Bond ETF (PZA) was issued by Invesco in October 2007 and is advised by Invesco PowerShares Capital Management, LLC. PZA charges an expense ratio of 0.28%, which is slightly greater than the average expense ratio of its category. PZA seeks to provide investment results corresponding to the performance of the ICE Bank of America Merrill Lynch National Long-Term Core Plus Municipal Securities Index. Like most index-tracking municipal bond ETFs, PZA generally invests at least 80% of its total assets in securities exempt from the federal alternative minimum tax comprising its underlying index. The underlying index includes U.S. dollar-denominated, investment-grade, tax-exempt bonds issued by states and territories within the U.S. or U.S. political subdivisions. The securities comprising the index must have remaining maturities of at least 15 years.
Since PZA invests in long-term bonds, it carries a moderately high degree of interest rate risk. PZA has an effective duration of 7.99 years, which indicates it theoretically loses 7.99% for an instantaneous 1% increase in rates across the municipal bond yield curve. To compensate for this interest rate risk, PZA offers a distribution yield of 3.29% and a tax-equivalent distribution yield of 4.38%. Based on PZA’s characteristics and its risk metrics, it is best-suited for long-term investors with a moderate-to-high risk tolerance in high tax brackets.