Capital Group Muni High-Income ETF Sees Record $1.5 Billion Inflow

The Capital Group Municipal High-Income ETF saw a massive inflow of $1.54 billion, the largest among US-based ETFs, bringing its assets from $241 million to $1.78 billion. The influx was driven by investors shifting assets from equities to long-term municipal bonds. The junk-rated muni sector is down 1.6% in 2025, while the broader muni market is up 0.1%.

Title: Municipal Bonds: Shifting Investor Focus and Opportunities in 2025

In a notable shift in investor sentiment, the Capital Group Municipal High-Income ETF has witnessed a massive inflow of $1.54 billion, the largest among US-based ETFs. This influx has brought its assets from $241 million to $1.78 billion, reflecting a significant movement of funds from equities to long-term municipal bonds [1].

The municipal bond market has seen a mixed performance in 2025. While the broader municipal market is up 0.1%, the junk-rated muni sector has experienced a decline of 1.6% [1]. This divergence highlights the varying performance of different segments within the municipal bond market. The recent underperformance of long-end municipal bonds, particularly those with maturities over 22 years, has created an opportunity for discerning investors.

A closer look at the municipal market reveals a striking performance gap. The five-year maturity segment of the municipal index has returned 3.07% year-to-date (YTD), while the 22+ year portion has seen a decline of -4.86% [2]. This performance gap has coincided with a steepening in the 5s/30s benchmark municipal yield curve, which now sits at 214 basis points (bps), more than double the U.S. Treasury curve at 96 bps [2].

Historically, sharp curve steepening in municipal bonds has been associated with strong forward returns for long-end municipals. Since the Global Financial Crisis (GFC) of 2007 to 2008, periods of sharp curve steepening have seen long-end municipals deliver 12-month forward returns averaging approximately 11%, significantly outperforming shorter-maturity municipals [2].

The recent weakness in long-end municipal bonds is attributed to a combination of technical factors. The municipal market is on pace for another year of elevated issuance, driven by deal acceleration earlier in the year and uncertainty around potential changes to the municipal bond tax exemption [2]. This supply surge has created a growing imbalance as the market faces challenges in absorbing long-end paper. Additionally, a shift in investor demand towards short-to-intermediate maturities has exacerbated this imbalance [2].

Despite the technical pressures, some investors are already seeing the long-end municipal market as a potential opportunity. High-quality 5% coupons trading at or below par are a rare occurrence, offering attractive yields for taxable and crossover buyers. For instance, a recent AAA-rated New York State deal priced at a 5.10% yield would yield 8.5% after tax for non-residents, jumping to 10.6% for New York State residents and 11.5% for New York City residents [2].

Invesco Municipal Opportunity Trust (VMO) has announced a $0.0625/share cash dividend, ex-dated August 18, 2025. This dividend reflects the fund’s focus on tax-exempt municipal bonds and its strong financial performance, with net income of $23.66 million and operating income of $27.98 million [3]. Historical backtests show that VMO shares recover dividend drops within an average of 5.64 days, with a 69% probability of recovery within 15 days [3].

The municipal bond market continues to offer opportunities for investors seeking tax-advantaged income. The recent inflow into the Capital Group Municipal High-Income ETF, driven by investors shifting assets from equities to long-term municipal bonds, underscores the market’s appeal. For institutional and tax-sensitive buyers, today’s long municipal market may be less an anomaly and more a timely entry point [2].

References
[1] https://www.morganstanley.com/im/en-us/individual-investor/insights/articles/opportunity-at-the-long-end-of-the-municipal-curve.html
[2] https://www.ainvest.com/news/invesco-municipal-opportunity-trust-announces-dividend-market-implications-recovery-patterns-dividend-date-2508/
[3] https://www.nuveen.com/en-us/insights/municipal-bond-investing/is-high-yield-high-risk