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ETF Specialist

Easier Muni Indexing Expands Investors' Choices

Improvements in technology and manager skill have made passively managed municipal index funds more desirable.

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Index funds have many advantages. Chief among them is their relatively low costs. Rather than trying to beat the market, an index investor can simply free-ride off the collective efforts that others put in to setting prices.

Some segments of the market lend themselves better to indexing than others. For the advantages of a passive approach to hold, the costs of replicating an index must be minimal. These costs will vary depending on a variety of factors, including the breadth, depth, liquidity, and standardization of the market segment in question. The cost of indexing a broad, deep, liquid and standardized asset class like U.S. large-caps is low. The cost of building an indexed portfolio of a narrow, shallow, illiquid, and nonstandardized asset class like municipal bonds is relatively higher.

Neal Kosciulek does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.