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Muni Bond Investors Are Interested in Strategic Beta ETF Strategies

This article was originally published on ETFTrends.com.

As the municipal bond market environment shifts, investors are reluctant to rely on traditional market capitalization-weighted index funds and want to look for more dynamic strategies like smart beta ETFs.

According to a recent Columbia Threadneedle Investments survey of financial advisors, while the majority of respondents favored actively managed investments when establishing municipal bond exposure for clients, interest in a muni bond strategic beta ETF is also strong. Around 55% indicated they would consider investing in a muni bond smart beta ETF or are already invested in such products and would consider others.

“Financial advisors are being pulled in multiple directions as they remain committed to doing what’s best for their clients,” Marc Zeitoun, Head of Strategic Beta at Columbia Threadneedle, said in a note. “The competing priorities of price and preference for active management are a good example of the balancing act they face. Strategic beta ETFs present a great middle ground between ‘best thinking active investment insight’ and passive implementation. It’s no wonder that track record and a firm’s expertise as an active fixed-income manager remain the most important factors when considering strategic beta ETFs.”

There are currently 15 U.S.-listed actively managed municipal bond ETFs on the market, with the First Trust Managed Municipal ETF (FMB) and PIMCO Intermediate Municipal Bond ETF (MUNI) among the largest options available.

Columbia Threadneedle has a smart beta fixed-income ETF, the Columbia Diversified Fixed Income Allocation ETF (DIAL) , which follows a rules-based multi-sector strategic approach to debt market investing. The underlying smart beta index covers six sectors of the debt market, focusing on yield, quality and liquidity. However, it does not include exposure to municipal debt.

There are currently no enhanced or strategic index-based municipal bond ETFs on the market, which may leave a great opportunity for the ETF industry to further develop ahead. The industry is only just beginning to make inroads into the smart beta fixed-income space, with 51 enhanced index-based bond ETFs currently on the market, according to XTF data.

Yield and Market Complexity

Along with its findings on smart beta muni bond ETF demand, the survey found that financial advisors are most concerned about yield and market complexity when investing in muni bonds for their clients.

Related: High-Yield Muni ETFs Will Continue to Shine

Around 43% of financial advisors indicated they were concerned with finding the right amount of yield to align with their clients' goal and preferences, and about 14% revealed concern over the complexity in the muni market post-2008, followed by unintended consequences of benchmark investing at 12%, and an inability to conveniently access all sectors of the muni market at 12%.

“Financial advisors are concerned about yield and market complexity when it comes to allocating client dollars to the muni space. This market has changed significantly in the last ten years, but there are still smart ways to invest in it if you know what to look for,” Catherine Stienstra, Head of Municipal Investments at Columbia Threadneedle, said in a note. “Traditional benchmark indices exclude viable investment options, are debt-weighted and can be over-concentrated in less attractive sectors. This puts advisors in a tough position when they try to balance cost-efficiency with investment opportunity. As passive investing continues to grow, rather than simply accept an imperfect benchmark portfolio, municipal bond investors with a preference for passive solutions should think about adopting a smart beta approach.”

For more information on the muni bonds market, visit our municipal bonds category. POPULAR ARTICLES FROM ETFTRENDS.COM