Columbia Threadneedle has lauched an ETF named Columbia Multi-Sector Municipal Income ETF MUST expanding on its strategic beta lineup. This ETF tries to serve as a core municipal bond allocation in investors’ portfolio. Further, it could complement the other main holdings by providing for higher tax exempt income and risk-adjusted return potential than traditional benchmark products (read: 5 Defensive ETFs to Survive Global Market Rout).
“Even though most investors’ current exposure to municipals is through actively managed portfolios or individual bonds, we’ve seen a growing interest in passive products in the municipal space,” Marc Zeitoun, head of strategic beta at Columbia Threadneedle Investments, said in a note.
Inside MUST
The fund tracks the Beta Advantage Multi-Sector Municipal Bond Index, which was created by Columbia Threadneedle’s municipal fixed-income team and is administered by Bloomberg Index Services Ltd. The index reflects a rules-based, multi-sector strategic beta approach to measure the performance of the U.S. tax-exempt bond market, comprising bonds issued by or on behalf of state or local governments.
The interest on these bonds is exempt from regular federal income tax but may be subject to alternate minimum tax. Focus is on yield, quality, maturity, liquidity, and interest rate sensitivity of the particular eligible universe. The index tracks five segments of the municipal debt market, each having a pre-defined weight: the municipal core revenue sector (45%); health care-related debt (20%); high-quality revenue bonds (15%); general obligation bonds (10%) and high-yield debt (10%) (read: How to Go Short on Rate-Sensitive Sectors With These ETFs).
The index excludes bonds from California, Guam, Puerto Rico and the U.S. Virgin Island bonds, along with other U.S. territories, commonwealths and possessions. It also excludes pre-refunded bonds, insured bonds, floaters, callable bonds with less than one year to call, tobacco bonds and derivatives.
Since its inception, the fund has amassed $15 million since its inception on Oct 10 and has an expense ratio of 0.28%.
How does it fit into a portfolio?
Owning municipal bonds are excellent choices for risk-averse investors looking to derive stable tax-free returns. “Today’s municipal market is comprised of nearly $4 trillion in assets spread out among more than one million debt offerings from 80,000 issuers,” Catherine Stienstra, head of municipal bond investments at Columbia Threadneedle Investments and serves as Lead Portfolio Manager of MUST, said in a note.
Recently, Moody’s investment service released US Municipal Bond Defaults and Recoveries, 1970-2017, citing two striking benefits that these bonds continue to offer. First, the muni bonds were highly rated in 2017 with upgrades narrowly outpacing downgrades for a second year running and secondly the five-year all-rated cumulative default rate (CDR) on bonds was quite low at 0.09% especially in comparison to 6.7% CDR of global corporate over the same time period (1970-2017), even amid headline-grabbing defaults by Puerto Rican entities.
However, the municipal bond market has lately been under pressure due to rising U.S. interest rates, fueled in large part by the Federal Reserve’s tightening of monetary policy. iShares National AMT-Free Muni Bond ETF (MUB) has had record withdrawals this month of $203.94 million (as of Oct 12).The municipal index lost 0.64% in the month of September (read: Yields Are Soaring: Here’s How to Short Treasury With ETFs).
Competition
MUB is the largest municipal bond ETF trading in the market having assets under management worth $9.5 billion and an expense ratio of 0.07%. A few other ETFs having lower expense ratios than MUST are Vanguard Tax-Exempt Bond Index ETF VTEB (0.09%), SPDR Barclays Short Term Municipal Bond SHM (0.20%) and SPDR Barclays Capital Municipal Bond ETF TFI (0.23%).
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SPDR-NB MUNI BD (TFI): ETF Research Reports

SPDR-NB ST MB (SHM): ETF Research Reports

VANGD-TAX EX BD (VTEB): ETF Research Reports

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