Municipal bond mutual funds: cornerstone of a strong portfolio

For US dollar investors, including some municipal bond (‘muni’) exposure should be core to their strategic asset allocation, adding diversity and quality to their investment portfolios. Historically, the market has been dominated by retail investors allocating into single assets without much focus on risk characteristics. This is changing, and FTSE Russell has adapted its muni indices to facilitate this process.

Over time, the broader exposure offered by mutual funds has grown in popularity. However, the newest and most significant growth sector has been in passive ETF funds. The downside of muni mutual funds is that they do not allow investors to maximize the tax-exempt potential of their muni allocation. However, by taking exposure to the whole market, rather than a handful of bonds, ETFs extend diversity, offer liquidity, lower costs and avoid the need for the idiosyncratic risks inherent with security selection. We expect demand for muni index products to grow.

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Supporting documents

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