Municipal bonds may not be the most exciting fixed income category out here, but they do play an important role in portfolios. Frequently offering tax-exempt opportunities and a solid base of reliable issuers, such bonds are often a pillar of the 40% side of portfolios. Where historically, mutual funds had limited the possibilities in muni bonds, the rise of active ETFs has unlocked muni bonds to a next level of potential.

While ETFs have been around for decades, they exploded in number and arguably, popularity, since the ETF rule was implemented in 2019. It was a catalyst that streamlined the launch of strategies within the wrapper, boosting product innovation and bringing more competition to all kinds of segments.

Muni Bonds Riding the ETF Wrapper

While today’s innovative products frequently include muni bonds, one might question how they compare to mutual funds in terms of their disadvantages and the challenges of active management. The ETF wrapper gives them all the advantages of being more readily tradeable, often more transparent, and easier to use than mutual funds. Toggling their usage as a vehicle for tax exempt assets like muni bonds is another major benefit that makes things significantly less complicated.

Adding active management to the mix is typically when funds start to take bigger leaps forward. When it comes to bonds, active management will typically outperform passive for a few important reasons. For instance, if bonds are called early or defaulted upon, passive funds are more likely to struggle to replace and replicate their index-specified bond weights. Active funds have potential to work more quickly to replace those bonds and stay on track to meet the fund’s goals.

Perhaps more relevant to the munis space, is the power of active management to closely scrutinize individual issuers. While municipal issuers are typically safer than some corporate ones, their credit ratings and outlooks can vary. On a bigger, global market scale subject to many variables, adaptable and active muni bond ETFs can prove to be a shrewd addition.

Advisors are also now using active muni bond ETFs to craft their own customized allocations. Such funds can add income, exempt assets from taxes, and boost overall portfolio performances in most economic conditions. 

Muni Bond Offerings in 2026

How should investors approach muni bonds in today’s climate?  As of last month, municipal bonds remained as the top-performing fixed-income category, YTD. Analysis from Charles Schwab also reported that despite March typically being their slowest month, munis are still likely to outperform their category. 

Investors may want to consider established municipal bond ETFs such as the Goldman Sachs Dynamic California Municipal Income ETF (GCAL). It actively invests in California and other muni bond opportunities, with up to 30% in non-investment-grade bonds. Charging a 30 basis point fee, the managers take both top-down and bottom-up approaches to provide income and performance. On track to hit its three-year ETF milestone next year, the fund has provided a 3.06% 12-month trailing distribution rate, according to Goldman Sachs data as of February 28.

Alternatively, the Goldman Sachs Dynamic Municipal Income ETF (GMNY) is the New York version of the same strategy, which charges the same 30 basis point fee.

With myriad pending factors such as control over the Strait of Hormuz, a Chinese invasion of Taiwan, and even a loss of confidence in AI, 2026 could see all stocks take a notable hit. But muni bonds, once contained within mutual funds, have emerged in active ETF wrappers providing adaptable solutions to boost portfolios in critical times.

Originally published on Advisor Perspectives

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