Open-end muni mutual funds lost $5.3 billion in the same period, and Vanguard says much of the cash may never return to the old wrapper.
Tax-loss harvesting pushed $23 billion into municipal bond exchange-traded funds in the third quarter, according to data compiled by Bloomberg. Open-end municipal mutual funds recorded net outflows of $5.3 billion over the same period.
The technique involves selling securities that have fallen in value to offset capital gains elsewhere in a portfolio. Tax rules require investors to swap into a similar but not substantially identical security for 30 days. Investors who moved into ETFs to harvest losses are unlikely to reverse the trade, said Justin Schwartz, head of municipals at Vanguard.
The Bloomberg Municipal Bond Index dropped to its lowest level in 14 months on Sept. 29. Since then, returns have climbed almost 6%. Munis fell about 6.4% in the third quarter, the biggest quarterly loss in more than four decades, as supply surged and Treasury yields rose.
Tax-loss harvesting continued in October even as the muni market rebounded 3.85%, according to JPMorgan Chase. Muni ETFs took in $20.8 billion that month, the largest inflow month ever, JPMorgan said in a Nov. 9 note citing LSEG Lipper data. Open-end muni funds lost $20.5 billion in October, the largest outflow month since April 2022.
ETFs account for 97% of the $76 billion in muni fund inflows this year, JPMorgan said. BlackRock's iShares National Muni Bond ETF and Vanguard's Tax-Exempt Bond ETF, the two largest muni exchange-traded funds, have taken in $14 billion and $12 billion respectively this year, according to Bloomberg data. Both funds track broad municipal bond indexes.
About 70% of the roughly $266 billion in muni ETF assets are in passive funds. Continued adoption of model portfolios by investment advisers may also contribute to ETF growth, said Matthew Gastall, head of municipal research and strategy at Bloomberg Intelligence. Model portfolios package ETFs and other funds into customised asset allocation strategies tailored to individual risk tolerances and planning objectives, he said.
The Deployment Angle
Family Office Real Estate Daily Desk · our analysis, not the source's
Family offices holding municipal bonds in separate accounts or through open-end funds should evaluate whether the tax-loss harvesting window remains open in their portfolios. If positions are underwater, swapping into a broad muni ETF for 31 days preserves the loss while maintaining market exposure. The question is whether to swap back or stay in the ETF wrapper permanently.
The arithmetic favours staying put if the cost structure is comparable. Vanguard's Tax-Exempt Bond ETF charges 0.06%, in line with many institutional share classes. TheETF offers intraday liquidity and no gate risk, advantages that matter when redemption queues form in open-end funds during credit events. But ETFs trade at premiums and discounts to net asset value, introducing basis risk that separate accounts and mutual funds do not carry.
For family offices deploying new capital into munis, the $23 billion third-quarter inflow and $20.8 billion October inflow suggest the ETF vehicle is now the default for tactical allocations. Co-investment alongside a credit-focused muni manager still makes sense for portfolios above $50 million seeking yield enhancement through private placements and unrated paper. Below that threshold, a passive ETF core with an active overlay in taxable-equivalent corporates may deliver better after-tax risk-adjusted returns than chasing specialised muni strategies in a crowded market.
Underwrite the possibility that bid-ask spreads widen as assets concentrate in a handful of ETFs. The iShares and Vanguard funds together absorbed $26 billion this year, giving two sponsors dominant share in a market where price discovery happens over the counter. That concentration increases the risk of intraday dislocations when redemptions spike, a scenario that argues for limit orders and scaled entry rather than market orders at the open.
