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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 shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.