Chart of the Week – October 7, 2024: Largest sustainable municipal bond funds

Observations:

• Focused sustainable municipal bond funds, a total of 20 funds offered by 16 fund firms, including five ETFs and 39 mutual fund share classes, with $1.7 billion in net assets as of August 31, 2024, represent a small segment of the focused sustainable long-term funds universe with $356.5 billion in assets as of the same date. The sustainable municipal funds segment is also eclipsed by the size of the taxable funds universe, representing just 3.4% of net assets. This is a much smaller component versus conventional municipal funds relative to taxable funds that make up about 13.6% of net assets, suggesting that there is room for growth. Unlike taxable funds, municipal funds invest in municipal bonds offering income that is exempt from federal income tax and, in some cases, local government taxes.
• The broad category is led by Municipal National Intermediate funds, followed by Municipal National Long funds and, to a much lesser extent, California Intermediate as well as Municipal Short funds.
• The ten largest funds, which are dominated by intermediate and long-dated funds, account for $1.5 billion in net assets, or 91% of the segment’s total assets. The ten funds range in size from the actively managed $40.5 million SPDR Nuveen Municipal Bond ESG ETF that qualifies otherwise eligible bonds to include either the municipal bonds of issuers that are considered a leader relative to peers in its sector with respect to environmental, social and governance outcomes or thematic bonds whose proceeds are used towards positive environmental or social projects, to the $328.5 million actively managed Calvert Responsible Municipal Income Fund. The fund is guided by Calvert’s Principles for Responsible Investment which provide a framework for considering ESG factors. The fund’s investments include municipal securities that Calvert believes may have a positive environmental and/or social impact, such as obligations that fund education, healthcare, community services, housing, water, public transportation and other public purposes.
• The broad municipal bond market as measured by the Bloomberg Municipal Bond Index was up 1.3% through the end of August (2.3% through the end of September), having been dragged down by negative returns in April and May that have been offset in subsequent months due to falling interest rates. The rebound is expected to sustain itself through the end of the year. Municipal bond funds recorded an average return of 0.76% in August and 6.5% over the trailing 12-month period, versus an average of 0.73% and 6.9% for the top performing funds, respectively . Of the four categories, National Long funds led with an average 12-month return of 7.9%, followed by National Intermediate funds that generated an average return of 6.1%.
• The best performing municipal fund, based on 12-month results, is the National Long actively managed $88.7 million Invesco Environmental Focus Municipal Fund that benefited from its longer weighted average maturity which was boosted by leverage via the use of inverse floating rate securities and tender option bonds. The fund seeks to invest primarily in municipal securities issued by issuers involved in projects or technologies with high potential positive environmental impact, as determined by the Invesco using its proprietary evaluation system, in areas such as land, water and energy conservation.