Investors continue to turn to low-cost core taxable bond ETFs in 2024. The Vanguard Total Bond Market ETF (BND) and the iShares Core Aggregate Bond ETF (AGG) gathered $2.5 billion and $2.1 billion, respectively, as of late February. However, on a total return basis, the pair were outperformed by their tax-free cousins.
AGG and BND were down 1.8% to start the year. They incurred wider initial losses than the 0.4% for the iShares National Muni Bond ETF (MUB) and the 0.6% for the Vanguard Tax Exempt Bond ETF (VTEB). Many fixed-income-minded advisors recently told VettaFi they planned to add muni bond exposure.
During a VettaFi webcast with abrdn in late January, we asked advisors, “Over the next 3 months, how will you be changing your allocation to municipal bonds?” Nearly two-thirds (66%) said they were considering a decrease, significantly more than the 6% that were considering a decrease.
Benefits of Municipal Bond ETFs
While advisors often own municipal bonds directly or through a mutual fund, we think municipal bond ETFs are gaining further attention. MUB and VTEB own thousands of investment-grade bonds from issuers around the country, and charge miniscule 0.05% net expense ratios. MUB has more exposure to AAA- and a lower stake in A-rated bonds than VTEB. This helps explain the slight performance difference between the pair. Both funds have an average duration of approximately six years and can support the core of a portfolio.
There are some popular funds for advisors seeking less interest-rate sensitivity given the uncertainty of monetary policy. The iShares Short-Term National Muni Bond ETF (SUB) and the SPDR Nuveen Bloomberg Short Term Municipal Bond ETF (SHM) manage $9 billion and $4 billion, respectively. However, we think SUB (1.8 years) and SHM (2.6 years) will not benefit as much if the Federal Reserve aggressively cuts interest rates in 2024.
