At a glance
- Vanguard Group's head of municipals, Justin Schwartz, expects a good share of that ETF cash to stay put.
- ETFs account for 97% of the $76 billion of inflows into muni funds this year, by JPMorgan's count.
- For an advisor, a swap made to bank a loss has become a vehicle decision: which wrapper the client holds for the next several years.
Tax-loss harvesting added $23 billion to municipal bond ETF assets in the third quarter while open-end muni mutual funds lost $5.3 billion, according to Bloomberg data cited by WealthManagement.com. Vanguard Group's head of municipals, Justin Schwartz, expects a good share of that ETF cash to stay put.
ETFs account for 97% of the $76 billion of inflows into muni funds this year, by JPMorgan's count. Muni ETFs took in $20.8 billion in October, the largest inflow month on record. Open-end muni funds lost $20.5 billion, their biggest outflow month since April 2022, JPMorgan said.
For an advisor, a swap made to bank a loss has become a vehicle decision: which wrapper the client holds for the next several years. Tax rules require the money to move into a similar but not substantially identical security for 30 days. Reversing now means buying back into a market that has moved. The Bloomberg Municipal Bond Index touched a 14-month low on Sept. 29 and has returned almost 6% since, so a reversal would realize a gain that eats into the harvested loss.
Schwartz described the trade-off in the same terms. "Are you going to take a gain to get back into the open-end fund?" he said. "Some of it will find its way back, but there's a good chance that a lot of it stays in the ETFs at this point."
Munis dropped about 6.4% in the third quarter, the biggest quarterly loss in more than four decades. A glut of municipal supply, weak seasonal reinvestment and tax-loss selling met rising Treasury yields. The market gained 3.85% in October and harvesting continued anyway, according to JPMorgan.
The cash concentrated in the largest index products. BlackRock's iShares National Muni Bond ETF has taken in $14 billion this year and Vanguard's Tax-Exempt Bond ETF $12 billion, both tracking broad municipal bond indexes, according to Bloomberg data. About 70% of the roughly $266 billion in muni ETF assets sits in passive funds. Continued adoption of model portfolios by advisors and their clients could add to muni ETF growth, said Matthew Gastall, head of municipal research and strategy at Bloomberg Intelligence.
In October the ETF inflow nearly matched the open-end outflow
Net flows in $B: municipal bond ETFs vs. open-end muni funds, third quarter and October
- Above zero
- Below zero
- Muni ETFs, Q3+$23B
- Muni ETFs, Oct.+$20.8B
- Open-end funds, Q3−$5.3B
- Open-end funds, Oct.−$20.5B
Show as table
| Label | Value ($B) |
|---|---|
| Muni ETFs, Q3 | +$23B |
| Open-end funds, Q3 | −$5.3B |
| Muni ETFs, Oct. | +$20.8B |
| Open-end funds, Oct. | −$20.5B |
Some of it will find its way back, but there's a good chance that a lot of it stays in the ETFs at this point.Justin Schwartz, head of municipals at Vanguard
Reported by the Products & portfolios desk from WealthManagement.com, citing Bloomberg data and a JPMorgan note citing LSEG Lipper data and Form ADV filings with the SEC (Vanguard Group). Published . Corrections