Chief ETF Strategist
Mutual funds still represent more than 80% of overall municipal fund assets, but momentum is with municipal bond ETFs. At around $24 billion, municipal bond ETFs have captured nearly half of year‑to‑date muni fund flows, with roughly 40% of those flows going to active ETF strategies.1 Investors are embracing the ETF wrapper for its flexibility and ease of implementation while pairing it with active management to target better outcomes in a muni bond market defined by growing dispersion and inefficiency.
Guide to ETFs – Slide 27
A supportive muni market backdrop: yields, value and demand
The municipal bond setup starts with income. Yields remain elevated versus recent history, keeping tax-exempt muni bonds compelling on an after-tax basis relative to many taxable fixed income options, especially for U.S. taxpayers focused on tax‑equivalent yield. That yield cushion is renewing demand for the asset class.
Guide to the Markets - Slide 39
Reinforcing the bid are two durable technical tailwinds: strong fund flows and reinvestment demand as coupons and maturities recycle cash back into the market. At the same time, supply remains healthy without overwhelming demand. Year-to-date issuance is in line with expectations and on pace for a record year, while new-issue supply has tilted toward the intermediate 7- to 10-year part of the curve.2
In this healthy supply–demand scenario, valuations can stay supported even with robust issuance, and active managers can continue to find relative value as the curve and new-issue mix evolve.
Why active matters more in munis: the curve, structure and credit dispersion
Municipals are increasingly a market of differences, not averages. Dispersion is rising across sectors and issuers, and pricing can diverge meaningfully based on structure, coupon, call features, liquidity and state-specific dynamics, often creating inefficiencies that broad beta exposure may not capture. That’s why active security selection and risk budgeting matter more as the market moves away from a “rising tide” regime.
Active management can also access and underwrite parts of the market that passive strategies typically won’t own because of index eligibility rules and benchmark constraints. For example, Google parent Alphabet recently came to market as the funding recipient in a California gas prepayment deal, marking the first time a hyperscaler tapped the muni market for funding. Interestingly, the deal was 12x oversubscribed.3 It’s the kind of idiosyncratic, structure-driven opportunity where credit work and deal-specific analysis provide an edge, and where active muni ETFs can potentially participate while passive strategies likely cannot.
JPMorgan’s leadership: JMUB + JMST and the #1 active muni ETF platform
JPMorgan is the largest active municipal ETF issuer by AUM with over $16 billion4, which is meaningful scale in a category that remains early in its adoption. The platform includes six ETFs spanning a range of credit and duration exposures, including two recently converted state-specific mutual funds. Core to that leadership are JPMorgan Municipal ETF (JMUB) and JPMorgan Ultra-Short Municipal Income ETF (JMST), the two largest active muni ETFs in the market.
JMUB is positioned as a core/intermediate building block where active decisions tend to matter most. This ETF captures value through diligent sector weightings, selective credit tilts, and thoughtful duration management.
- Sectors and themes: JMUB is positioned for demographic aging. An allocation to senior living drives its overweight in healthcare and hospitals, balanced by a smaller exposure to education.
- Credit and structure tilts: The portfolio is overweight corporate-backed municipal deals, industrial development (IDR) bonds and pollution control revenue (PCR) bonds, guided by careful security selection by an experienced muni research team. It is underweight general obligations (GOs) due to a preference for revenue bonds that typically offer more spread for similar risk. Additionally, the portfolio is cautious on gas prepays, maintaining a higher-quality profile to avoid potential private credit fallout.
- Duration and the curve: Duration is neutral at roughly 6.1 years. While the team expects a strong June driven by heavy reinvestment flows, a disciplined approach is warranted given potential volatility and outflows. On the curve, exposure has shifted toward the 10-year, where valuations are more attractive after underperformance.
The portfolio remains overweight the 20-year, the steepest and most attractive segment of the curve.
JMST complements JMUB with a shorter, more capital-preservation-oriented posture. It is designed for investors who want to stay in tax-exempt income but keep rate sensitivity tighter, particularly when cash alternatives are competing for dollars.
- Yield: Positioned as a “cash-plus” strategy, JMST has offered a roughly 70-basis point yield pickup versus average Morningstar tax-free money market fund SEC yields. Notably, since the last Federal Reserve rate hike in July 2023, JMST has outperformed “Municipal Cash” in 100% of rolling 12-month periods.5