Muni bond ETFs gathered $6.3 billion in the first nine months of 2023. However, a healthy $1.4 billion flowed in during September alone. According to Columbia Threadneedle, there is good reason to focus on the asset category.
“We’re getting closer to the end of the Fed tightening cycle,” explained Catherine Stienstra, head of municipal investments at Columbia Threadneedle, in an exclusive interview at VettaFi’s NY office. “Historically, the municipal market outperforms when rates are stable or are heading lower.
Muni Bond Default Rates Are Low
Stienstra added that municipal bond yields are attractive on a tax-equivalent basis and the default rates are lower than corporate bond equivalents. Indeed, according to Moody’s Investment Service, speculative-grade municipal bonds have had a 6.8% default rate in the last 32 years, significantly lower than the 30% rate for similarly rated global corporate bonds. Meanwhile, investment-grade municipal bonds had a miniscule 0.1% default rate, far less than the 2.2.% for corporate bonds equivalents.
Stienstra has 35 years of investment experience and is a portfolio manager for the actively managed Columbia Strategic Municipal Income mutual fund as well as the index-based Columbia Multi-Sector Municipal Income ETF (MUST).
MUST Is Not a Traditional Index ETF
MUST launched in 2018 as the first strategic beta municipal bond ETF. Many traditional index peers are constructed based on debt issuance and only hold investment-grade bonds. MUST is different; it was built leveraging the expertise of Stienstra and her active management colleagues.
The portfolio managers made decisions at the onset to include or exclude sectors and states seeking a more balanced maturity profile, generating enhanced income and relative value. For example, according to Stienstra, MUST has no exposure to bonds issued by California, and limited exposure to New York. Yields for bonds from these states tend to be lower due to the higher tax rates. In contrast, MUST’s exposure to states like Illinois and Texas is higher.