Investors now have additional options for obtaining exposure to tax-exempt debt as the number of exchange-traded funds devoted to the municipal bond market seems poised to grow.
“The ETF business in munis is in the early innings,” Morgan Stanley Investment Management co-head of municipals Craig Brandon stated over the phone. “I think you’re going to see more and more of the muni space moving toward ETFs.”
Investors seeking tax-exempt income, especially those who are “very wealthy,” are drawn to the $4 trillion muni market, according to Brandon. He stated that Morgan Stanley, which already offers two muni ETFs—the Eaton Vance Intermediate Municipal Income ETF (EVIM) and the Eaton Vance Short Duration Municipal Income ETF (EVSM)—is preparing to introduce a high-yield muni ETF.
On February 10th, BlackRock declared that it has transformed its high-yield municipal bond mutual fund into the iShares High Yield Muni Active ETF HIMU, an exchange-traded fund. The company stated that the actively managed exchange-traded fund “aims to maximize federal tax-exempt current income and capital appreciation by investing in high-yield municipal securities across a variety of sectors.”
Late last month, Nuveen announced the launch of two actively managed ETFs, the Nuveen Municipal Income ETF NUMI and the Nuveen High Yield Municipal Income ETF NHYM, that are aimed at municipal bonds. Additionally, Vanguard just announced active ETFs that target muni bonds. Two of these products, the Vanguard Core Tax-Exempt Bond ETF VCRM and the Vanguard Short Duration Tax-Exempt Bond ETF VSDM, were introduced by the company in late November.
“You’re more likely to buy munis if you’re in the 37% tax bracket,” Brandon added. “The higher the tax bracket you’re in, the more valuable the muni exemption is.”
According to BlackRock’s 2025 muni projection, the tax-equivalent yield for the market’s high-yield section was somewhat more than 9%.
BlackRock offers a number of muni ETFs, including index-tracking and actively managed products.
BlackRock’s index funds include, for instance, the iShares National Muni Bond ETF MUB, iShares Short-Term National Muni Bond ETF SUB, and iShares New York Muni Bond ETF NYF. Funds like the iShares Intermediate Muni Income Active ETF INMU and the iShares Short-Term California Muni Active ETF CALI are part of the company’s active lineup.
According to Pat Haskell, who leads BlackRock’s municipal-bond department, “Muni credit in general is very strong,” during a phone interview. According to him, investors may “pick up” incremental income in a market with low default rates, even if high-yield muni bonds are riskier than investment-grade bonds.
While actively managing the iShares High Yield Muni Active ETF, Haskell stated, “Our job is to make sure we get the security selection right,” with the goal of outperforming the market. According to him, BlackRock is keeping a “vigilant” eye on risks, such as wildfires and other natural calamities.
According to Haskell, the company has created “a couple of different AI tools,” one of which aids in the analysis of risks and calamities associated with climate change. In order to assess factors like how strong a local tax base is to sustain an investment in a muni bond, he said the company also utilizes AI to follow economic activity across the United States, including by county and Zip code.
“Municipal issuers have a strong track record of recovering from natural disasters without impairments to bondholders,” a paper released last month by the Wells Fargo Investment Institute stated. “No state or local government whose bonds are rated by Moody’s has defaulted because of a natural disaster.”
Haskell said there is a “very low probability” that the tax exemption will be revoked, but the muni market is at risk as the Trump administration looks for ways to lower the U.S. budget and there are discussions in Washington about this possibility.
“One of the few things that polls well on both sides of the aisle is infrastructure,” he stated. “This is the market that we fund infrastructure with in this country.”
According to Haskell, the muni market, like the larger fixed-income market, is susceptible to inflation and the associated volatility of interest rates.
