Money managers circling in on $142B muni ETF space

Wall Street’s biggest money managers are zeroing in on a $142 billion segment of the municipal-bond market.

There have been 27 muni exchange-traded fund launches this year, marking an annual record as firms like PGIM and Rockefeller Asset Management muscle into the space. That momentum represents a longer-term bet on ETFs that cater to state and local-government debt investors, given it can take years for the products to garner substantive inflows.

“If they’re currently in the mutual fund business, they need to have a presence in the ETF market,” said Patrick Luby, a strategist at CreditSights Inc. The launches are indicative of the direction asset managers see the market going, he said. “Where is the muni puck going to be in three or five or 10 years? It’s going toward the ETF.” 

That said, it can take a while for new products to gain adoption. Investors can be skeptical of buying a small-sized fund without a track record.

There are about 40 muni ETFs that have less than $50 million in assets — representing about a third of the market, according to data compiled by Bloomberg. Some have struggled to gain inflows since launching in prior years, while market juggernauts monopolize the cash. The market’s two largest funds — passively run products by BlackRock Inc. and Vanguard Group Inc. —  have a combined $78.2 billion in assets.

Despite the competition, asset managers are keen to not miss out on the ETF wave. MFS Investment Management, a long-time mutual-fund shop, launched its first ETFs in December - including a muni fund. As part of the launch of the MFS Active Intermediate Muni Bond ETF, the firm invested $25 million in seed funding.

Overall, muni ETFs have seen inflows of about $17 billion this year, besting last year’s total but paltry compared to a record haul of $29 billion in 2022, according to data compiled by Bloomberg. Luby said he thinks the slowdown is reflective of sluggish demand for munis overall in the first half of the year. Inflows have picked up in the second half, he said.

Courtney Wolf, a portfolio manager for Capital Group’s CGMU, said she’s optimistic about the trajectory for muni ETFs due to the strong demand for the asset class as well as the “positive attributes” of the ETF structure itself.

ETFs must disclose their holdings daily, offering transparency for investors. Plus, they trade intraday, giving investors more confidence around the price of fund shares they buy and sell.

“The muni asset class fundamentally is in really good shape right now,” she said. The fund has grown to $2.6 billion in assets since launching in 2022. “Valuations are compelling. So I think there’s a lot of tailwinds for the muni asset class into 2025.”

ETFs are also known for being more tax efficient and less costly for investors, helping the products gain adoption across a variety of asset classes. Municipal bonds typically pay interest that’s exempt from federal taxes, making the asset class appealing to high-net-worth individuals in particular.

“ETFs and municipals – they’re an optimal union. The tax-exempt municipal investor base is telling us that they want to focus on tax efficiency,” said Alex Petrone, director of fixed income for Rockefeller Asset Management. Her firm launched three muni ETFs this year.

JPMorgan Chase & Co. strategists led by Peter DeGroot said the trajectory of ETFs in other asset classes suggests “room for growth” in the municipal-bond market. 

“We expect municipal ETFs will continue to gain market share, based on their current growth trajectory, ease of use, and the historical glide path in other assets classes,” they wrote in a November research note.