More Funds Are Holding Municipal Bonds Than Individuals

For the well-to-do, municipal bonds offer a way to access tax-free income while also getting debt exposure of high quality. However, it’s been funds that have been fans of munis lately versus individual investors.As noted, individual investors of high net worth have been the typical demographic when it comes to flocking toward municipal bonds. The interest and appeal of munis may not have changed, but it’s how they are held in a portfolio that might be changing.“One factor aggravating volatility in munis this year: Asset managers’ increasing share of a $4 trillion market once dominated by buy-and-hold individual investors,” a Wall Street Journal report said.“The share of outstanding municipal bonds held by U.S. households fell to 40% in the first three months of the year from 46% in 2020,” according to a Municipal Securities Rulemaking Board report scheduled for release Wednesday. The report added further, “the board, a self-regulatory body overseeing the muni market, analyzed Federal Reserve data and determined that the market is shifting from direct ownership of bonds to investment through funds.”Muni Exposure in an ETF WrapperThe exchange-traded fund (ETF) has long been lauded as a dynamic investment vehicle that gives investors easy ingress to the bond markets. Investors can get this level of exposure to munis via the Vanguard Tax-Exempt Bond ETF (VTEB A-).VTEB tracks the Standard & Poor’s National AMT-Free Municipal Bond Index, which measures the performance of the investment-grade segment of the U.S. municipal bond market. This index includes municipal bonds from issuers that are primarily state or local governments or agencies whose interests are exempt from U.S. federal income taxes and the federal alternative minimum tax (AMT).Having muni exposure in the convenience of an ETF wrapper still provides individual investors with ease of access.“Even though individual investors are going down, it is still an individual investor market unlike any other market,” said John Bagley, the Municipal Securities Rulemaking Board’s chief market structure officer. “They have a lot of ways to access it: mutual funds, ETFs, SMAs, individual brokerage accounts. The components that make it up have changed but the overall number has been pretty consistent.”For more news, information, and strategy, visit the Fixed Income Channel.

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