Looking Ahead at ETFs for the 2027 Muni Bond Outlook

Recent research from Northern Trust Asset Management has helped jumpstart the conversation about the 2027 muni bond outlook. The coming year appears poised to see U.S. states exhibit strong credit resiliency, backed by high rainy day reserves, healthy sales, and income tax receipts.

Specifically, the analysis cites briskly growing tax revenues, including 4% YoY sales tax growth and robust personal income tax results (up 9.5% YoY). With rainy day funds also highlighted as being above pre-pandemic levels, muni bond issuers appear well positioned to continue issuance pace into 2027.

What does that mean for muni bond ETFs, then? Over this past year, muni bond ETFs have seen plenty of opportunities. While rising yields have pressured prices, they also invite investors to reinvest or to look for some upside. For those entering muni bond ETFs today, long-term income potential could be available as well.

See More: Selectivity & Quality Take Center Stage in Muni Bond ETFs

That tax-exempt income could prove very useful as costs continue to rise, especially for those at or near retirement. Income and tax-exempt assets can reduce overall bills at the end of the year, helping portfolios meet client goals and expectations.

What’s more, muni bond ETFs — especially those that actively invest — can potentially outperform muni bond mutual funds in this environment. Thanks to the ETF wrapper, such funds can frequently provide greater overall tax efficiency than muni bond mutual funds can. Combine that tax efficiency with active flexibility that adapts to key rate shifts, and those ETFs can play a convincing, core role in bond portfolios.

Comparing Top-Performing Muni Bond ETFs and Strategy Options

Funds like the iShares National Muni Bond ETF (MUB) and the Vanguard Tax-Exempt Bond ETF (VTEB) provide key examples of muni bond ETF performances this year. MUB charges a five basis point fee for a passive approach to muni bonds. It has added $6 billion over the last six months, per ETF Database data, lifting it to $46 billion in AUM at press time. The fund offered a 6.9% Tax Equivalent SEC Yield as of September 29, according to iShares data.

Meanwhile, VTEB, which charges a 3 bps fee, also takes a passive approach. The fund provides exposure to tax-exempt state- and local-issued debt in a market-cap-weighted index. According to ETF Database data, VTEB has added $9.86 billion in net inflows over the same period and produced a Tax Equivalent Yield of about 6.5% for a 35% tax rate.

Northern Trust also launched two new muni bond ETFs recently. The firm added New York- and California-focused muni bond ETFs, adding muni bonds exempt from those state taxes. The Northern Trust New York Intermediate Tax-Exempt Bond ETF (TXNY) and the Northern Trust California Intermediate Tax-Exempt Bond ETF (TXCA) represent a growing lineup of state-specific options.

Together, those strategies offer a wide range of tools to capture strong muni bond yields in the coming year. With creditors strong and yields high, 2027 could present a very potent opportunity for a reset in investors’ bond holdings, leaning heavily into muni debt.

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