Spurred by low yields and the threat of higher taxes, money is pouring into tax-free municipal bond ETFs, according to new analysis from CFRA, an independent fund research and rating firm.

Tax-free muni ETFs took in $16.4 billion in net inflows through Oct. 7, up from $14.6 billion for the entirety of 2020, Todd Rosenbluth, CFRA head of ETF and fund research, said in his latest blog.

“Some of the drivers of increased demand include the likelihood of higher taxes under the Biden administration encouraging investors to seek tax-free alternatives, the recovery of many municipalities as local economies strengthened and the need for above-average income given low interest rates,” Rosenbluth told Financial Advisor magazine.

“We also think investors’ growing comfort in the liquidity of fixed income ETFs has helped municipal bond products gain traction,” Rosenbluth said. “Despite representing 6.8% of the fixed income ETF universe, municipal bond ETFs have gathered 11% share of $154 billion of net inflows for the asset category as of Oct. 7.”

According to CFRA data, the $16.4 billion of year-to-date tax-free muni bond ETF inflows beat corporate bonds ($16.2 billion) and Treasury and hovernment bonds ($8.7 billion) inflows, despite managing far less assets.

The two largest tax-free muni ETFs are iShares National Muni Bond ETF (MUB) and Vanguard Tax-Exempt Bond ETF (VTEB), but there are also some large index-based ETFs zeroing in on higher-yielding securities “that can be used to boost income in an asset allocation strategy,” Rosenbluth said.

For instance, PIMCO recently launched a core-plus actively managed municipal bond ETF that invests in speculative-grade bonds.

ETF muni investors typically need to choose between an investment-grade or high-yield approach, Rosenbluth said. On the high investment-grade side are the $24 billion MUB and the $15 billion VTEB. VTEB charges an expense ratio that is one basis point less than MUB and the funds track different benchmarks. Both funds sport 12-month yields of 1.8%, CFRA reports.

Both “funds also focus primarily on high-investment-grade-rated securities. Indeed, just 7.6% of VTEB’s recent holdings and 5.6% of MUB’s recent holdings were rated BBB, the lowest investment-grade rating, while both funds had approximately 75% of assets in bonds that are rated AA or higher,” Rosenbluth said.

At the other end of the spectrum, investors can take on additional credit risk in search of higher income with the $3.7 billion VanEck High Yield Municipal Index ETF (HYD 62) or the $1.8 billion SPDR Nuveen Bloomberg Barclays High Yield Municipal Bond ETF (HYMB 60 ), Rosenbluth said.

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