Thanks to higher yields and rising uncertainty in the equity markets, investors have once again started to consider bonds for their portfolios. Leading the way has been the municipal bond market. Interest in new fund launches and fund flows into muni ETFs has surged over the last year as investors look to realize lower taxes and high-income potential. But not all muni ETFs are the same. And investors may be leaving some returns on the table if they choose a passive ETF for their muni exposure.
Active is the way to go.
That’s according to a new report by Goldman Sachs. It turns out that active ETFs are the best vehicle for muni bond exposure. Thanks to several benefits inherent to active management, investors can achieve better outcomes in an active muni ETF than by simply holding the index. For investors, the choice is clear: active ETFs for muni bonds.
The Muni Bond ETF Appeal
The municipal bond market usually is as exciting as watching paint dry. Issued by state/local governments and featuring tax-advantaged or tax-free income potential, the conservative nature of these bonds attracts conservative investors, pension funds, and insurance firms. It’s boring and features a very “buy & hold” subset of investors.
However, lately, there has been a significant increase in buying & holding from a wide range of investors across both retail and institutional channels.
Demand for munis has skyrocketed in recent years, led by a surge in demand for municipal bond ETFs. All in all, Muni ETFs have grown to $144 billion in assets under management (AUM) as of the end of the second quarter—an impressive leap for a boring and often under-utilized asset class.
The reasons for the interest in munis come from two main points. For starters, there has been the income potential. Thanks to the excellent rate reset of 2022, municipal bonds are now yielding amounts not seen since the 1990s. This has made them highly appealing to investors seeking to secure strong current income rates. Those high yields are even more advantageous when you consider muni’s tax advantages.
Thanks to future tax uncertainty due to high fiscal spending, munis’ ability to offer tax-free income at both the federal and state levels has been a real draw for investors across various tax brackets.
Active Is Better
However, investors may want to steer their interest towards active ETFs over passive ones. According to asset manager Goldman Sachs, investors will achieve better outcomes with active management rather than index-hugging.
For starters, Goldman Sachs suggests that yield curve positioning is an area where active managers can outperform passive index strategies. Over the last few years, the slope and shape of the yield curve have been ever-shifting as expectations about the Federal Reserve, rate cuts/increases, and stubborn inflation have taken hold. For passive investors, this is a problem.
Most muni bond indexes tend to focus on long-maturity bonds. This has been a persistent issue in the ever-shifting rate environment, leading to price losses for many municipal bonds. Nevertheless, active managers can consider various strategies to manage both duration and the dynamics of the yield curve. This can include following a bullet maturity distribution, a barbell maturity structure, or a laddered approach.
The second piece where active can win comes down to index construction and adding credit to boost yield while continuing to manage duration.
According to the Bloomberg Municipal Aggregate Index, the five states of New York, California, Texas, Florida, and Illinois collectively account for 52% of the benchmark. However, of these five states, only Illinois managed to outperform the national index. Even then, this was a snap-back of years’ worth of underperformance. For investors betting on the index, there are numerous missed opportunities in other states. Goldman pegs the total number of muni bond issuers at over 50,000. 1
Additionally, the potential for managers to bet on different segments of the muni bond market to capitalize on credit opportunities is a significant advantage for active ETFs. Investors tend to paint muni bonds with a broad brushstroke, often lumping them in with general obligation bonds. But the revenue and high-yield market offers plenty of stability and extra yield. According to Goldman, the municipal high yield index yields 5.85%, or 9.88% on a tax-equivalent basis. The higher yield and additional factors, such as callability and premiums, have allowed the municipal high yield index to return 4.42% annually over the last decade, compared to 2.16% for the broader municipal index.
These factors have allowed active managers in the muni sector to have better hit rates and outperformance than passive strategies. This chart from the investment bank highlights the continued consistency of outperformance.
Source: Goldman Sachs
Interesting to note that as active ETFs have seen their costs decline, they’ve begun to pull away from active mutual funds in the muni bond space.
Go Active For Municipal Credit
With the potential to outperform by not tracking the index and utilizing credit to their advantage, active muni bond ETFs should be the first stop for investors looking to the bond subsector. Ultimately, these funds should deliver higher yields with lower risks than indexing alone.
The best part is that as interest in investing has surged, so has the number of choices for active muni bond exposure. Both 2023 and 2024 saw a record number of active muni bond ETF launches, and 2025 is shaping up to be another excellent year for ETFs in the sector. Going active is an easy proposition.
Active Municipal Bond ETFs
These ETFs were selected based on their ability to provide low-cost and active exposure to the municipal bond market. They are sorted by their YTD total return, which ranges from -1.8% to 3.1%. They have expense ratios ranging from 0.12% to 0.65% and assets under management of $418 million to $3.4 billion. They are currently yielding between 2.8% and 4%.
| Ticker | Name | AUM | YTD Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| SMMU | PIMCO Short Term Municipal Bond Active ETF | $890M | 3.1% | 2.9% | 0.35% | ETF | Yes |
| MEAR | iShares Short Maturity Municipal Bond Active ETF | $1.1B | 2.8% | 2.8% | 0.25% | ETF | Yes |
| IMNU | iShares Intermediate Muni Income Active ETF | $919M | 1.7% | 3.6% | 0.41% | ETF | Yes |
| HMOP | Hartford Municipal Opportunities ETF | $576M | 1.7% | 3.5% | 0.29% | ETF | Yes |
| CGMU | Capital Group Municipal Income ETF | $3.36B | 1.6% | 3.9% | 0.27% | ETF | Yes |
| MUNI | PIMCO Intermediate Municipal Bond Active ETF | $2B | 1.6% | 3.3% | 0.35% | ETF | Yes |
| MMIT | NYLI MacKay Muni Intermediate ETF | $1B | 1.6% | 3.6% | 0.47% | ETF | Yes |
| DFNM | Dimensional National Municipal Bond ETF | $1.57B | 1% | 3% | 0.19% | ETF | Yes |
| VCRM | Vanguard Core Tax-Exempt Bond ETF | $429M | 0.5% | 3.5% | 0.12% | ETF | Yes |
| SHYM | iShares High Yield Muni Income Active ETF | $370M | 0.3% | 4.4% | 0.41% | ETF | Yes |
| TAXF | American Century Diversified Municipal Bond ETF | $508M | -0.2% | 4% | 0.29% | ETF | Yes |
| FMB | First Trust Managed Municipal ETF | $2.04B | -0.3% | 3.5% | 0.65% | ETF | Yes |
| AVMU | Avantis Core Municipal Fixed Income ETF | $148M | -1.8% | 3.9% | 0.15% | ETF | Yes |
All in all, municipal bonds have garnered considerable interest in recent months as investors seek high yields and low tax potential. And much of that interest has been invested in ETFs. However, the choice is clear among funds: active is generally better than passive. Thanks to the ability to use credit and active duration management, active ETFs in the space should continue to outperform passive funds over the long haul.
Bottom Line
When it comes to muni bonds and investor allocations, the choice is clear. Go active! Active ETFs in the space have a host of benefits designed to beat passive ETFs. And beat them, they have!
1 Goldman Sachs (July 2025). Active Matters For Munis: The Added Advantages of Active ETFs
