Multiple decades have passed since John “Jack” Bogle revolutionized investing and taught us that index-like returns should be the bare minimum our clients should expect from their portfolios. High-fee products that couldn’t generate long-term outperformance no longer met “the standard.”
Since then, indexing strategies have grown exponentially, particularly within ETFs. If an investor felt their manager was not meeting their expectations of index-or-better returns, there were many substitutes that could.
Municipal bonds, a fragmented asset class, was slower to mature in the passive trend. For a long time, many considered the concept of “municipal indexing” an oxymoron.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Because with nearly 1 million bonds in this market, every buy decision within a portfolio presents a large benchmark-relative overweight and therefore benchmark-relative risk.
Even Vanguard offered only active strategies for municipals for decades.
However, recent improvements in technology, data, systematic trading and risk analytics have enabled a more effective set of conditions for municipal indexing to be successful.
Flows have acted accordingly. Assets in passively managed municipal ETFs stand at $118 billion, nearly tripling over the last five years.
Over this time, the number of ETF products hasn’t expanded as rapidly. Instead, the rise in assets is attributable to incumbent products becoming larger, more diversified and more liquid.
Just as it did for other asset classes decades ago, indexing is now setting the “Bogle standard” for municipal investing: Do not settle for less than index-level returns!
Investors now have a variety of at-scale passive municipal strategies at their fingertips across investment-grade state and national exposures.
Regardless of vehicle (mutual funds, ETFs, direct bond purchases and SMAs), high earners should recognize the evolution of this market, with this new standard for municipal investing, and reassess their expectations for investment outcomes.
Our clients should now be asking for more from their municipal investments, unwilling to compromise for anything less than index-or-better returns.
A few last thoughts to round out the picture:
- We use the phrase “index-or-better returns” to capture the idea that active managers are still highly valuable in this fragmented market, but investors should require such managers to outperform over full market cycles net of fees.
- Some managers will deliver excess beta within supposed investment-grade strategies and call it alpha. Be discerning, look at benchmark-relative drawdowns and ensure the strategy is what you think it is.
All investing is subject to risk, including the possible loss of the money you invest.
Although the income from a municipal bond fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund's trading or through your own redemption of shares. For some investors, a portion of the fund's income may be subject to state and local taxes, as well as to the federal Alternative Minimum Tax.
Related Content
- Five Considerations About Municipal Bonds if Tax Cuts Sunset
- How to Survive Market Mayhem
- Four Ways to Invest in Quantum Computing
-
Quiz: Do You Really Know How Social Security Benefits Are Taxed?Quiz Social Security benefits often come with confusing IRS tax rules that can trip up financially savvy retirees and near-retirees.
-
Are You Ready for 65? The Medicare Initial Enrollment Period QuizQuiz Turning 65 soon? Test your basic knowledge of Medicare's Initial Enrollment Period (IEP) rules in our quick quiz.
-
3 Ways to Stretch the 2026 Social Security COLA For Your BudgetThree steps retirees can take to stretch the Social Security COLA to fit their budgets.
-
Giving Tuesday Is Just the Start: An Expert Guide to Keeping Your Charitable Giving Momentum Going All YearInstead of treating charity like a year-end rush for tax breaks, consider using smart tools like DAFs and recurring grants for maximum impact all the year.
-
Uber Takes Aim at the Bottom Lines of Billboard Personal Injury LawyersUber has filed lawsuits and proposed a ballot initiative, in California, to curb settlements it claims are falsely inflated by some personal injury lawyers.
-
Dow Slides 427 Points to Open December: Stock Market TodayThe final month of 2025 begins on a negative note after stocks ended November with a startling rally.
-
A Financial Adviser's Health Journey Shows How the 'Pink Tax' Costs WomenFact: Women pay significantly more for health care over their lifetimes. But there are some things we can do to protect our health and our financial security.
-
I'm a Cross-Border Financial Adviser: 5 Things I Wish Americans Knew About Taxes Before Moving to PortugalMoving to Portugal might not be the clean financial break you expect due to U.S. tax obligations, foreign investment risks, lower investment yields and more.
-
What to Make of a Hot IPO MarketThis year's crop of initial public offerings could be even dicier than usual because of a skew toward tech and crypto.
-
How to Position Your Portfolio for Lower Interest RatesThe Federal Reserve is far from done with its rate-cutting regime. This is how investors can prepare.
-
Show of Hands: Who Hates Taxes? The Best Time to Plan for Them Is Right NowBy creating a tax plan, you can keep more of what you've earned and give less to Uncle Sam. Here's how you can follow the rules and pay only your fair share.
