Mom and Pop Buying Fewer Muni Bonds Directly as ETFs Heat Up

Mom and pop investors long have been staple retail buyers of state and local debt. Now that’s changing as fewer and fewer are directly purchasing municipal bonds in the $4 trillion market.

The value of bonds directly owned by households fell by $18 billion in the fourth quarter of 2021, dropping to the lowest level since 2008, according to Federal Reserve data. Instead, those buyers are moving toward mutual funds and exchange traded funds, which have roughly doubled their muni holdings over the last decade.

Managed accounts offer buyers more liquidity and diversification, and their rise has put a spotlight on fund flow data as a key bellwether of the market’s health. It also has homogenized the market by condensing individuals’ investment strategies into the hands of account managers looking to beat a benchmark.

“When individual investors were the drivers of the market, every investor is different and you had this incredible diversity for buyers and sellers,” said Patrick Luby, municipal strategist at CreditSights. “Munis will maintain their appeal to individual investors, but I think the way they access munis will continue to shift.”

Together, direct and indirect retail account for almost three-quarters of the muni market’s total value, dwarfing the holdings of insurance companies and U.S. banks, which each held about 12% in the fourth quarter.