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Municipal Bonds Enter 2026 With Tailwinds

BY | ETF Database
01/05/2026 | 131 VIEWS
For a portion of 2025, municipal bonds scuffled amid concerns about the state of the U.S. economy, a spate of new issuances and lack of clarity from the Federal Reserve on interest rates.Skeptics may assert those issues haven’t been fully resolved. However, it is clear that municipal bonds ended last year with some momentum. That could pave the way for 2026 upside for the asset class and ETFs such as the ALPS Intermediate Municipal Bond ETF (MNBD B-). With advisors and investors seemingly renewing their affinity for tax-advantaged income-generating assets, the actively managed MNBD could be in style this year. An increasingly alluring fundamental picture for municipal bonds supports that thesis.Why MNBD Could Be Magnificent in 2026Including a recent spate of inflows to municipal bond funds, signs are mounting that this year could bring improvement for the asset class and ETFs like MNBD. “The Federal Reserve’s first rate cut of the year, in September, seems to have ignited investor enthusiasm for bonds. October 2025 saw the largest monthly inflow into both taxable and tax-exempt fixed-income funds since 2021,” noted Morningstar’s Dan Lefkovitz. “Strong September jobs data and improved valuations were further boosts to munis. So too was the passage of the Big Beautiful Bill, which preserved the tax exemption.” Additionally, the tax-equivalent yields — the yield investors command on municipal bonds when accounting for tax advantages — on many muni bond funds and ETFs is attractive compared to what’s found with Treasuries. That too could be a catalyst for inflows to products like MNBD. In fact, some investors may find advantages with an ETF like MNBD over traditional aggregate bond funds. “But I don’t see why a well-diversified allocation to munis can’t serve as a core bond allocation. Beyond their tax-free income, munis offer similar diversification benefits as high-grade taxable bonds. Some years they will outperform their taxable counterparts, and in other years, they’ll lag,” added Lefkovitz. With the aforementioned tax exemption in place, valuations increasingly attractive and issuance expected to slow to more palatable levels, municipal bonds can extend their momentum this year. With the benefits of active management, MNBD could be one of the 2026 leaders of a municipal bond ETF resurgence. For more news, information, and analysis, visit the ETF Building Blocks Content Hub.

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