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More Muni Bond ETFs on the Way

Starting this week, investors can expect to see a slew of exchange-traded funds tracking municipal bonds, which are debt obligations issued by state or local governments, or government agencies.

They are coming to market after 24 ETFs tracking Treasurys and corporate bonds were launched this year, boosting total assets in bond ETFs to $26.78 billion as of July 31, compared with $18.17 billion a year earlier.

Like these other bond ETFs, the muni bond funds will help lower transaction costs, particularly for smaller investors. Bonds are traded only over the counter, making it difficult to know whether you're getting a fair price. You can end up paying as much as 2% in transaction costs on muni bond purchases.

It's not clear if the muni bond ETFs will gain as big of a following as the Treasury and corporate ETFs, however. Munis aren't as actively traded by big investors like hedge funds, and retail muni bond investors tend to use a buy-and-hold strategy. That means the ability to trade the muni ETFs throughout the day on an exchange may be less of a draw.

Barclays Global Investors was the first out of the gate Monday with the launch of the iShares S&P National Municipal Bond Fund (MUB) on the American Stock Exchange. Munis in the index it tracks must have a credit rating of at least triple-B-minus and have a minimum outstanding par amount of $50 million.
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