Fidelity expands ETF shelf with muni bond strategies

Fidelity Investments has launched two new municipal bond ETFs, expanding its lineup of fixed income products as investor appetite for tax-advantaged and cost-efficient vehicles continues to grow.

The two funds – Fidelity Municipal Bond Opportunities ETF and Fidelity Systematic Municipal Bond Index ETF – are now trading on Nasdaq and available commission-free on the firm’s online brokerage platforms.

The products launched on Monday, which were converted from existing mutual funds, will maintain their respective investment strategies.

The actively managed Fidelity Municipal Bond Opportunities ETF carries a gross expense ratio of 0.30 percent, while the passively managed Fidelity Systematic Municipal Bond Index ETF has an expense ratio of 0.05 percent.

The addition of the two funds brings roughly $229 million in assets under management to Fidelity’s fixed income ETF offerings.

Fidelity’s expansion comes as advisors continue to increase their exposure to ETFs, particularly in fixed income. According to internal data from Fidelity, the number of advisor portfolios using fixed income ETFs rose by 6 percent over the past year. Roughly two-thirds of the portfolios analyzed had some allocation to fixed income.

The shift has been especially pronounced among actively managed ETFs. In 2022, just 13 percent of advisors using Fidelity’s platform held active ETFs in client portfolios. That figure climbed to 40 percent by the end of 2024, with average allocations around 21 percent. Fixed income made up the largest share of those active ETF allocations, with 57 percent of analyzed portfolios using ETFs for that exposure.

Beyond Fidelity, demand for municipal bond ETFs continues to rise industry-wide. UBS noted in a recent commentary that the number of municipal bond ETFs has grown to 112, representing 141 billion dollars in total assets shared by 36 issuers in the space.

Despite the increase in product diversity, the market remains concentrated. BlackRock and Vanguard account for a combined 68 percent of total municipal ETF assets, with 41 percent and 27 percent market share, respectively. Actively managed municipal ETFs have played a key role in the asset class’s expansion, with 70 funds now comprising 17 percent of total municipal ETF assets.

Since the first municipal bond ETF debuted in 2007, the percentage of municipal debt held in ETFs has grown from one-fifteenth to one-sixth of the market. While both mutual funds and ETFs in the muni space have seen asset growth over the past 15 years, ETF inflows have outpaced those of mutual funds and remained more consistently positive.

In 2024, municipal ETFs took in 18 billion dollars in net flows, with broad-based municipal strategies capturing 67 percent of that activity.

Market conditions may also be reinforcing demand. On Friday, Bloomberg noted how municipal bonds rallied as invesrtors sought refuge from equity market volatility driven by geopolitical tensions and trade-related fears. Muni bonds are often seen as a defensive allocation during uncertain periods due to their relatively stable revenue backing.