February 12, 2021

Municipal Bond Funds and ETFs Attract Near-Record Weekly Fund Flows in the First Six Weeks of 2021

by Tom Roseen.

Despite concerns of a possible increase in defaults, slightly stronger taxable-equivalent yields over their Treasury counterparts, along with Democratic-controlled House, Senate, and presidency have been a strong tailwind for municipal bond fund flows.

Many pundits believe that state and local municipalities will now be included in upcoming stimulus packages, where under the prior administration, they weren’t mentioned. Additionally, the Biden administration’s focus on infrastructure spending might add to municipal bond fund momentum. Most investors believe that more stimulus will eventually require tax increases to cover the burgeoning debt obligations. These, along with the increasing chance that President Joe Biden will reverse the 2017 corporate tax cuts, could be catalysts for the recent increase in demand for tax-exempt income.

Year to date through the Refinitiv Lipper fund-flows week ended February 10, 2021, mutual fund and ETF investors have injected $19.1 billion into municipal bond funds. For the most recent flows week, municipal bond funds attracted $2.6 billion, their fourth largest weekly net inflows on record.

Perhaps more telling is the flows pick up for municipal bond ETFs (+$372 million), while still relatively small, the group witnessed its sixteenth consecutive week of net flows this past week. Conventional fund investors injected the second largest weekly net sum on record, injecting $2.3 billion for the most recent one-week period. Four of the six strongest net flows into municipal bond funds (including ETFs) have occurred this year.

While some advisors have cautioned municipal bond investors to carefully research and understand the inherent risks of the high yield municipal bond offering as of late, High Yield Municipal Bond Funds (+$4.3 billion, including ETFs) attracted the second largest draw of net new money year to date as investors continued their quest for yield. For the most recent fund-flows week, conventional fund investors injected a net $745 million into High Yield Municipal Bond Funds (their third largest weekly net inflows on record), while ETF investors were net purchasers of High Yield Municipal Bond ETFs to the tune of $87 million.

So far in 2021, General & Insured Municipal Debt Funds (+$5.7 billion including ETFs) attracted the largest sum of net money of the group, followed by High Yield Municipal Debt Funds, Short Municipal Debt Funds (+$3.2 billion), Intermediate Municipal Debt Funds (+$2.7 billion), and  Short/Intermediate Municipal Debt Funds (+$2.2 billion).

Based on year-to-date estimated net flows through the end of January 2021, the individual main attractors of investors’ assets in the municipal bond fund space were Vanguard Intermediate-Term Tax-Exempt Fund, Admiral Shares (VWIUX, +$913 million), USAA Tax Exempt Intermediate-Term Fund, Institutional Shares (UITIX, +$906 million), Vanguard Limited-Term Tax-Exempt Fund, Admiral Shares (VMLUX, +$881 million), Vanguard Tax-Exempt Bond Index ETF (VTEB, +$772 million), and iShares National Muni Bond ETF (MUB, +$598 million).

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