How Active ETFs Brought Muni Bonds Investing to Life

Municipal bonds may not be the most exciting fixed income category out here, but they do play an important role in portfolios. Frequently offering tax-exempt opportunities and a solid base of reliable issuers, such bonds are often a pillar of the 40% side of portfolios. Where historically, mutual funds had limited the possibilities in muni bonds, the rise of active ETFs has unlocked muni bonds to a next level of potential.

While ETFs have been around for decades, they exploded in number and arguably, popularity, since the ETF rule was implemented in 2019. It was a catalyst that streamlined the launch of strategies within the wrapper, boosting product innovation and bringing more competition to all kinds of segments.

Muni Bonds Riding the ETF Wrapper

While today's innovative products frequently include muni bonds, one might question how they compare to mutual funds in terms of their disadvantages and the challenges of active management. The ETF wrapper gives them all the advantages of being more readily tradeable, often more transparent, and easier to use than mutual funds. Toggling their usage as a vehicle for tax exempt assets like muni bonds is another major benefit that makes things significantly less complicated.

Adding active management to the mix is typically when funds start to take bigger leaps forward. When it comes to bonds, active management will typically outperform passive for a few important reasons. For instance, if bonds are called early or defaulted upon, passive funds are more likely to struggle to replace and replicate their index-specified bond weights. Active funds have potential to work more quickly to replace those bonds and stay on track to meet the fund’s goals.

Perhaps more relevant to the munis space, is the power of active management to closely scrutinize individual issuers. While municipal issuers are typically safer than some corporate ones, their credit ratings and outlooks can vary. On a bigger, global market scale subject to many variables, adaptable and active muni bond ETFs can prove to be a shrewd addition.