Muni Bond ETFs Continue to Impress (HYD, MUB, XMPT)

Muni Bond ETFs Continue to Impress (HYD, MUB, XMPT) Despite being ensconced in controversy as states and cities struggle to get their fiscal houses in order, municipal bonds remain a favored asset class among income investors. Prized for their

. It's that conservative nature that is helping some muni bond ETFs look like market standouts in an environment where anything that smells of risk is being repudiated. The good news is there might be upside to be had among muni bond ETFs. "Month-to-date and year-to-date performance of all muni high-yield bond sectors (with the exception of tobacco) has been positive." said Jim Colby, portfolio manager and senior municipal strategist at Market Vectors, one of the dominant sponsors of muni bond funds. Colby added: "The technicals of demand overpowering supply are still in place." Remember, muni bonds have had to navigate some less-than-inspiring headlines over the past few years. There was the credit crisis of 2008 and the ensuing recession of 2009-2010. Last year, noted analyst Meredith Whitney was featured on "60 Minutes," warning of impending doom in the muni bond market. Then there municipal defaults in Alabama and Pennsylvania last year followed by one in Stockton, California this year. Those negative headwinds haven't stopped muni bond ETFs from being legitimate "shelter from the storm" plays. Including Friday's loss, the S&P 500 is flirting with an 8% decline in the past month. On the other hand, the Market Vectors High-Yield Muni ETF

and the iShares S&P National AMT-Free Muni Bond ETF

are up 1.5% and 1.2%, respectively. What may come as a surprise to some investors is the states that are seeing the strongest inflows into flows. Of the

. "Larger cities and states have weathered the slow recovery relatively well; at least well enough to convince investors that potential value resides in issuers rated BBB as compared to those rated AAA," Colby said. California and New York municipal issues combine for over 29% of HYD's weight. In MUB, which has over $3 billion in assets under management, California and New York issues account for over 40% of that ETF's weight. Regarding the $621 million HYD,

. So-called experts are crowing about liquidity concerns and issuer default, but as Colby noted in an interview with Benzinga earlier this month, "less than half of 1% of all rated bond issues default." Those are decent odds in favor of investors. Those that claim investors are running away from high-yield bonds should consider the following: When we examined HYD and other muni bond ETFs on May 16, HYD had $604.4 million in AUM. It started trading today with $621.4 million in AUM. Raking in $17 million in new assets isn't bad for two weeks of work. Then there is the matter of yield. MUB's current yield is 3%, which is better than what an investor would get with the Dow or S&P 500. The Market Vectors Long Municipal Index ETF

yields over 4% while HYD and the Market Vectors CEF Municipal Income ETF

are both in the area of 5%. So it's not surprising that in a market that is rewarding conservative income plays that ETFs mentioned are all within spitting distance of new 52-week highs. For more on bond ETFs, please click

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