Municipal Bond ETFs: A Tax-Advantaged Haven for Income Seekers in a Low-Yield World

In an era where traditional income sources struggle to keep pace with inflation and rising interest rates, municipal bond ETFs have emerged as a compelling solution for investors seeking tax-advantaged returns. Among these, the Columbia Multi-Sector Municipal Income ETF (MUST) stands out for its disciplined approach to dividend consistency and cost efficiency. This article examines MUST's recent performance and dividend trends to assess its role as a stable income generator in a challenging market environment.

Dividend Consistency: A Decade of Progress

MUST's dividend history reveals a pattern of cautious but steady growth. Over the past decade, the ETF has paid dividends in eight of ten years, with a recent 12-month dividend of $0.53 and an expected $0.63 over the next year. This corresponds to a forward yield of 3.16%, calculated from its July 2025 dividend of $0.05 per share. While not a perfect track record, the ETF's monthly payout structure and 2.20% year-over-year increase in its most recent distribution signal a commitment to maintaining investor income.

For context, MUST's yield outperforms many peers in the municipal bond space. Peers like the Franklin Dynamic Municipal Bond ETF (FLMI) and Hartford Municipal Opportunities ETF (HMOP) offer yields of 3.84% and 2.75%, respectively, but often at the cost of higher volatility or credit risk. MUST's 0.23% expense ratio, one of the lowest in its category, further enhances its appeal by preserving more of its yield for investors.

Performance in a Low-Yield Environment

Despite its modest yield, MUST has demonstrated resilience in a market where even municipal bonds face headwinds. Over the past year, the ETF returned 1.89%, closely matching the ETF Database Category Average of 1.91% and outperforming the FactSet Segment Average of 0.86%. While short-term underperformance—such as a -1.10% 3-month return—has occurred, its 1-year net assets under management (AUM) grew by $147.19 million, reflecting strong investor inflows.

This growth is driven by MUST's diversified portfolio of 600 holdings, with no single bond exceeding 0.74% of assets. By spreading risk across multiple sectors and issuers, the ETF mitigates the impact of defaults or credit downgrades. Additionally, its exposure to the Bloomberg Beta Advantage Multi-Sector Municipal Bond Index ensures broad market coverage, reducing concentration risk.

Tax-Advantaged Returns: The Real Edge

The true strength of MUST lies in its tax-exempt status. For investors in the top U.S. federal tax bracket (37%), the ETF's 3.29% dividend yield translates to a taxable-equivalent yield (TEY) of 5.23%. This calculation, derived from the formula TEY = (Tax-Exempt Yield) / (1 - Tax Rate), highlights how tax-exempt income can outperform taxable alternatives. For example, a taxable bond yielding 7.38% would be needed to match the after-tax return of a 30-year AAA municipal bond yielding 4.37%.

MUST's TEY advantage is further amplified by its low expense ratio. At 0.23%, it ranks among the most cost-efficient municipal bond ETFs, allowing investors to retain more of their tax-free income. This is particularly valuable in a low-yield environment, where every basis point matters.

A Cautionary Note on Risks

While municipal bonds are generally low-risk, investors should remain mindful of two factors: interest rate sensitivity and credit quality. MUST's duration—measured at 5.87 years—means it is moderately sensitive to rate changes. A 100-basis-point increase in rates could reduce its net asset value by roughly 5.9%. However, its focus on high-grade (investment-grade) bonds and active management by Columbia Threadneedle help mitigate credit risks.

Recent events, such as the Los Angeles wildfires, underscore the potential for climate-related disruptions to municipal credit. Yet, defaults remain rare, and the ETF's diversified holdings ensure that no single issuer's distress would significantly impact its performance.

Conclusion: A Compelling Case for Income Investors

For investors prioritizing stability and tax efficiency, MUST offers a balanced approach. Its consistent dividend growth, low costs, and broad diversification make it a standout in the municipal bond ETF space. While its yield may lag behind high-risk alternatives like leveraged equity ETFs, its tax advantages and defensive characteristics align with the needs of long-term income seekers.

In a low-yield world, the combination of tax-exempt income and strategic diversification is hard to beat. As municipal bond issuance remains robust and tax-equivalent yields climb, MUST is well-positioned to serve as a cornerstone of a tax-smart income portfolio.