Today's launch of the Invesco US Municipal Bond UCITS exchange traded fund (ETF) seeks to provide investors with an opportunity for higher yields than are generally available from the US investment grade credit market without taking on additional credit risk.
The ETF is the first of its kind in Europe.
Gary Buxton, head of EMEA ETFs and Indexed Strategies at Invesco, said: "We are pleased to be bringing the first municipal bond ETF to the European market. This launch opens the door to an asset class that until now has been difficult for investors to access. Municipal bonds, or ‘munis' for short, offer higher yields, better average credit ratings and much lower default rates than US investment grade credit. We believe that unusual profile could make them attractive for many income investors."
The index our ETF tracks is currently yielding around 0.30% more than the typical US investment grade credit benchmark."
Municipal bonds are issued by US local governments either as taxable or tax-exempt debt depending on what they are being used to finance. Unlike the more common tax-exempt variety, the interest from taxable munis is not subsidised by the federal government, meaning they offer attractive risk-adjusted yields that are more comparable to other taxable securities such as corporate debt.
A recent change to US tax law has spurred a substantial increase in the issuance of taxable municipal bonds over the past two years, as local governments took advantage of low interest rates. Nearly $140bn of debt was issued in 2020, compared to an average of under US$30 billion issued annually from 2011-18.
Paul Syms, head of EMEA ETF Fixed Income Product Management at Invesco, said: "Taxable munis and investment grade credit have demonstrated high correlation historically, but munis have not participated to the same extent in the rally that has driven the credit market since the Fed initiated its bond buying programme last year. The index our ETF tracks is currently yielding around 0.30% more than the typical US investment grade credit benchmark, while offering higher credit quality."
"This ETF is the latest in our innovative income range, which addresses the growing demand from investors looking for sensible solutions that complement core fixed income holdings. We see its potential as an almost like-for-like replacement for some of an investor's corporate credit exposure, albeit with slightly longer duration. Alternatively, it could be of interest to some more cautious investors looking to increase yield without having to take on excessive credit risk."