February 23, 2018

Municipal Bond Funds Continue to Appeal to Investors

by Patrick Keon

Municipal bond funds (including both mutual funds and ETFs) took in $347 million of net new money for the fund-flows week ended Wednesday, February 21, 2018. The week’s results grew the overall year-to-date net inflows for the group to over $6.8 billion. This solid performance during the first part of 2018 continued the trend from the prior year, during which it had positive net flows of $25.4 billion. In fact, as the graph below illustrates, the muni debt funds peer group posted four consecutive annual net inflows (2014–2017) on the heels of the group’s worst ever annual net outflows of $64.2 billion for 2013.

The only prolonged dip during this positive run (now entering its fifth year) occurred during fourth quarter 2016. The muni debt fund peer group saw its coffers shrink almost $25.0 billion during November and December of that year. These significant outflows were triggered by the election of Donald Trump as President of the United States. The group’s negative reaction to this event was primarily in response to Trump’s campaign promise to cut taxes; the plan to reduce the top federal tax rate would lessen the value of the tax-exempt benefit provided by muni bonds. However, the negative investor sentiment was temporary in nature; the group took in $3.3 billion of net new money in January 2017, starting a streak of 11 consecutive monthly net inflows.

The lion’s share of the net inflows this year has come from the Thomson Reuters Lipper General Muni Debt Funds (+$3.9 billion) and Intermediate Muni Debt Funds (+$3.3 billion) peer groups. In the General Muni Debt Funds group American Funds Tax-Exempt Bond Fund of America has had the largest net inflows (+$2.6 billion), while Vanguard Intermediate-Term Tax-Exempt Fund (+$1.3 billion) has topped the Intermediate Muni Debt Funds classification.

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