BlackRock converts high yield muni fund to ETF

BlackRock converted its high-yield municipal bond mutual fund into an actively-managed high-yield exchange-traded fund this week as ETFs continue to grow in popularity in the muni market.

There are now 114 municipal ETFs, according to Pat Luby, senior municipal strategist at CreditSights. BlackRock’s marks the fourth — and likely the largest — conversion of a muni mutual fund into an ETF to date.

“The fact that BlackRock thinks it makes good long-term business sense to move assets into a product with lower fees is a pretty strong vote of confidence in the long-term importance of ETFs,” Luby said.

The iShares High Yield Muni Active ETF, or HIMU, will “maintain identical investment objectives and fundamental investment policies as its predecessor mutual fund,” BlackRock, the world’s largest asset manager, said in a press release.

“Today’s higher interest rate environment provides a generational opportunity to capture income, particularly in the municipal bond market,” said Pat Haskell, the head of the municipal bond group at BlackRock, in the release. “Through the ETF wrapper, HIMU aims to take advantage of the attractive yield levels and strong credit quality in municipal bonds, delivering alpha to our clients in an efficient and transparent manner.”

Haskell will be one of five portfolio managers at the ETF, along with Kevin Maloney, Ryan McDonald, Phillip Soccio​ and Walter O’Connor.

Money has been moving out of muni mutual funds into ETFs and separately managed accounts. The latest Federal Reserve data shows household ownership of individual bonds was the largest holding category at 44.8%, followed by mutual funds at 19.5%, and exchange-traded funds at 3.2%. But ETFs have been outpacing mutual fund growth. Mutual funds increased to $810.9 billion in Q3 2024, rising 11.4% from Q3 2023. Meanwhile ETFs surged to $133.3 billion, up a whopping 23.4% from Q3 2023.

BlackRock projects that global active ETF assets will hit $4 trillion by 2030 from the $900 billion in assets in active ETFs at the end of June 2024.

ETFs help promote secondary market liquidity in the muni market, Luby said.

“Even for participants who don’t get involved in the ETF part of the market, now that HIMU is actively traded, that means that the authorized participants who will make markets in the shares and will create and redeem transactions, it means every one of those broker-dealers will have a very well-formed opinion about what CUSIPs are in the ETF and what CUSIPs they may have to go long if they have a redemption of shares,” Luby said. “So now all of a sudden there are market makers who are involved in the ETF who are going to be very well informed as to what they think the underlying CUSIPs are worth.”

There have been 118 completed mutual fund-to-ETF conversions since 2021, three of which have been muni mutual fund-to-ETF conversions: two from J.P. Morgan in 2023 and one from Morgan Stanley’s subsidiary Eaton Vance in 2024, according to Morningstar Direct data.

With 114 ETFs trading in the space, the market may be nearing a saturation point — but not yet, Luby said.

“Asset managers who envision being in the space in a few years and appealing to the wealth management business and distribution channels, absolutely must be in the ETF business, and if they’re not in it now, they need to be, because the shelf space is getting tight,” he said.