Investors pulled more than $500 million from municipal bond funds in March and the largest ETF tracking the fixed-income sector is selling at a discount to net asset value, suggesting the asset class is out of favor with investors.
“Only when we see net asset values moving back toward positive territory are we likely again to start seeing fund inflows,” Mikhail Foux, a muni analyst at Citigroup, said in the article.
Muni bond ETFs have been volatile in recent months on lingering worries the asset class may lose its tax perks. Interest income from municipal bonds is tax-exempt at the federal level.
Illinois reaching a settlement with the Securities and Exchange Commission last month over charges it committed securities fraud when it issued municipal bonds from 2005 to early 2009 has also rattled investors. [Muni ETFs Fall on Tax Worries, Illinois Fraud Settlement]
MUB, the muni bond ETF, has normally traded at a premium since listing in 2007, so the discount could be seen as an opportunity for bargain hunters.
Also, last month’s selling in muni bonds needs some context. “March has been the worst-performing month for municipal bonds for years, producing positive returns only five times since 1990,” Barron’s reported. “Investors often sell munis ahead of April’s tax deadline, while March sees comparatively few maturing bonds that generate proceeds in need of reinvestment. Hence, the typical slump.”
Muni bond ETFs haven’t seen large outflows yet, so these investors appear to be staying put despite the recent price swings.
“The exponential growth of exchange traded funds in recent years has resulted in a plethora of ETF offerings in virtually every sector and asset class, and municipal bonds have been no exception,” writes Mark Cussen for Investopedia.
“These versatile instruments have become popular with investors in higher tax brackets and fill a specific niche in the wide selection of fixed-income offerings that are now available,” he added. “Many fixed-income investors who sought tax-free interest in the past through individual municipal securities will find municipal ETFs to be attractive alternatives in several respects.”
iShares S&P National AMT-Free Municipal Bond Fund
The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
- Investment & Company Information
- municipal bonds