5 Largest Municipal Bond ETFs

March 12, 2013

By investing in ETFs, an investor reduces the amount of risk in their investments. Since the primary advantage of an ETF is diversification, if a particular stock or bond declines, there is less effect on the overall investment. An investor who is interested in a specific segment of the market may choose to invest in an ETF that tracks that sector. This can be used as an alternative to buying individual stocks or bonds [for more municipal bond ETF analysis sign up for a free account ].

Municipal bonds have been sold for centuries, but the bond market has been evolving. There are now options to invest in individual bonds, bond funds (like mutual funds or ETFs), money market funds and bond unit investment trusts. In 1993, ETFs began trading in the United States, which gave bond investors a new alternative to how they invested. Unlike individual bonds, municipal bond ETFs trade on an exchange.

Below are the five largest municipal bond ETFs by assets under management.

1. S&P National Municipal Bond Fund (MUB )

This ETF tracks the S&P National AMT-Free Municipal Bond Index, which measures the performance of the investment grade segment of the U.S. municipal bond market. MUB has an expense ratio of 0.25% and more than $3.6 billion in assets. The ETF s assets are made up of about 92% U.S. bonds, and the rest in cash. In total, this ETF has more than 2,200 holdings.

2. SPDR Barclays Short Term Municipal Bond ETF (SHM )

SHM tracks The Barclays Capital Managed Municipal Short Term Index, which is a rules-based and market-value-weighted index of short-term, tax-exempt U.S. municipal bonds. Included in the ETF are state and local general obligation bonds, revenue bonds, insured bonds and pre-refunded bonds. SHM has more than $1.6 billion in total assets while charging just 20 basis points for investment. The fund has around 400 total holdings, all of which are either focused on U.S. bonds (99.5%) or are invested in cash (0.5%).

3. SPDR Barclays Municipal Bond (TFI )

This ETF tracks The Barclays Capital Municipal Managed Money Index. This index is a rules-based, market-value-weighted index that focuses on non-taxable bonds. The ETF requires all bonds in its index to be rated Aa3/AA or above by at least two of the following agencies: Moody s, S&P and Fitch. TFI currently has $1.2 billion in assets and charges 20 basis points. There are over 400 holdings in this ETF.

4. Insured National Municipal Bond Portfolio (PZA )

PZA tracks the BofA Merrill Lynch National Insured Long-Term Core Plus Municipal Securities Index. The index tracks the performance of AAA rated, insured, non-taxable, long-term debt, publicly-issued U.S. bonds. This ETF has an expense ratio of 0.28% and a little over $1 billion in total assets.

5. Market Vectors-Intermediate Municipal Index ETF (ITM )

With more than $740 million in total assets, this ETF tracks The Barclays Capital AMT-Free Intermediate Continuous Municipal Index. The index focuses on investment-grade municipal bonds with a nominal maturity of six to 17 years. ITM has an expense ratio of 0.20%, with 99.5% of its assets in U.S. bonds and the remaining assets in cash.