Municipal Bond ETFs are having a moment, to put it mildly as investor demand surged in 2025 and into 2026. According to a Morningstar report, January inflows into the category were their second highest on record, at over $15 billion. In February, investors added nearly $11 billion to municipal bond funds, one of the strongest categories by flows that month. So what’s behind the momentum? A potent combination of strong performance, rising supply, and an evolving investor base.

“Performance has been excellent,” Thomas Casey told The ETF Show. Case is a Senior Portfolio Manager on the Municipal Bonds team at Insight Investment at BNY Investments. 

“Despite very heavy supply… the market performed exceptionally well, and we were able to digest that supply with relative ease.”

The supply increase has been significant. New issuance reached $580 billion last year, Casey explained, driven in part by post-COVID project delays coming back online, as well as rising construction and borrowing costs. But demand has kept pace, thanks to a broader, more diverse set of buyers.

“The diversity of the buyer base has increased, and ETFs are an important part of that,” Casey said, noting strong inflows and growing participation from both institutional and retail investors. 

ETFs especially have played an important role in improving the muni market’s structure, which has historically been fragmented by thousands of issuers and millions of unique securities.

“That volume and the progression and growth of ETFs has created a big buyer base,” Casey noted. 

“And that's increased liquidity to a large degree on both large and small blocks of bonds. So they've been a great participant in the market, a welcome participant.”

Fundamentals are also standing strong. Municipal credit quality, broadly speaking, has continued to hold up, supported by rising local revenues and improved reserve positions, Casey explained.

“Municipal credit quality is very, very good,” he said, explaining that while upgrade momentum has slowed, it reflects a ‘normalization’, and not a deterioration in credit conditions. 

But not all parts of the market are equally valued right now, opening the door to opportunity.

Casey sees opportunity in essential service revenue bonds like water, sewer and transportation. He argues they are often more overlooked compared to general obligation bonds. 

General obligation bonds tend to be more familiar to investors, and therefore more heavily bid, leaving revenue bonds underappreciated.

“We love essential service revenue bonds,” Casey said. “They offer significant yields and credit quality is very, very good.”

“We think those are fundamentally undervalued,” he continued. 

This dynamic highlights one of the advantages of active management within the ETF wrapper. While ETFs have helped improve liquidity and transparency, the muni market is still inefficient, creating opportunities for fund managers to exploit consistent mispricings. 

Casey also emphasized the structural benefits of ETFs themselves, pointing to what he described as the “three T’s”: tax efficiency, trading, and transparency. 

“I think all of those elements… that are a bit different than the other ways to access the muni market,” he said. ETFs can be used either as a standalone exposure or as a complement to a separately managed account or mutual fund, he hotels.

As flows continue and supply remains elevated, muni bond ETFs are becoming an increasingly central part of the fixed income landscape. And for investors, the opportunity might not just be the category itself, but in looking beyond the most familiar parts of the market. 

Source: The ETF Show - Navigating Municipals: Supply Absorption, Curve Opportunities, and ETF Access