Hartford Municipal Opportunities ETF (HMOP)

HMOP is an exchange-traded fund that invests in municipal bonds — debt issued by states, cities, and other local governments — with a specific focus on bonds rated below investment grade or in credit transition. Rather than passively tracking an index, HMOP is actively managed by Hartford Funds, which selects bonds it believes offer superior income relative to their actual risk of default.

Municipal bonds and the tax advantage

Municipal bonds carry a fundamental advantage in the US tax system: the interest they pay is typically exempt from federal income tax and sometimes from state income taxes if you live in the issuing state. That exemption creates a two-tier market. A taxable corporate bond paying 5% is equivalent in after-tax terms to a municipal bond paying 3.5% if you are in a 30% marginal tax bracket. This tax efficiency makes munis attractive to high-income investors, but it also means the yields quoted on municipal bonds can appear deceptively low compared to corporate or Treasury yields until you factor in the tax savings.

Hartford Funds has managed municipal bond portfolios for decades, building expertise in assessing the credit risk of local governments and the revenue streams that back their debt. HMOP was created to offer that skill at the scale and accessibility of an ETF.

Why HMOP exists: the opportunity set in non-investment-grade munis

Investment-grade municipal bonds — those rated BBB or higher by rating agencies — make up the bulk of the municipal bond universe and are the typical holdings of broad muni ETFs and individual portfolios. They pay lower yields but carry minimal default risk. Below investment grade (rated BB or lower, also called “junk” or “high-yield” munis) are less common. They include bonds from financially stressed municipalities, special revenue bonds backed by volatile revenue streams, and development projects with uncertain outcomes. They pay higher yields to compensate investors for the elevated risk.

HMOP’s opportunity is straightforward: Hartford’s managers believe some of these higher-yielding, lower-rated munis are underpriced relative to their actual risk, and that careful credit analysis can identify the ones that will not default while capturing yields 2–3 percentage points above investment-grade munis. If they are right, investors earn extra income; if they are wrong, they suffer credit losses that more than offset the extra yield.

The credit research edge

Hartford’s value proposition depends on its ability to analyze municipal credit better than the broader market. The firm studies the finances of issuers, the specific revenues backing each bond (tolls from a bridge, lease payments from an office park, property tax collections), and the legal protections that give bondholders priority over other creditors. A bond that rating agencies mark as BB because the issuer had a tough year might be safer than the rating suggests if Hartford sees improving finances or a specific revenue stream that is more stable than the market assumes.

That research has a cost — active management fees — and it requires that the managers’ forecasts be better than average. Over long periods, active mutual funds struggle to beat passively managed index funds after fees, but in niche markets (such as lower-rated municipal bonds, where research is specialized and information less efficiently priced) active management has historically earned its fee more often. HMOP’s expense ratio is higher than a passive municipal bond ETF but lower than most active mutual funds, a middle ground designed to preserve the skill advantage while not pricing it prohibitively.

Concentration and event risk

Because HMOP focuses on lower-rated bonds, it is concentrated in a narrower universe of issuers. A few problematic municipalities or sectors can weigh on the fund’s performance. Pension funding crises in specific states, industrial decline in regions dependent on one sector, or unexpected revenue shortfalls (such as a city losing major tax revenue if a large employer leaves) can hit non-investment-grade bonds harder and faster than investment-grade bonds, which are spread across thousands of issuers and have more buffer.

HMOP must also navigate the risk of event downgrades — situations where a municipality’s credit rating is abruptly lowered, causing the bond’s market price to fall sharply. Hartford tries to identify and avoid deteriorating credits before they are downgraded, but perfect prediction is impossible. A sharp market decline in munis, or a specific regional credit crisis, can cause sudden losses.

Tax efficiency and holding periods

Municipal bond ETFs are relatively tax-efficient if held long term, because bond interest (unlike dividend interest) is not subject to short-term capital-gains taxation — it is simply interest income, exempt from federal tax (and often state and local tax). However, if you sell HMOP at a capital loss (because interest rates rose or credit conditions deteriorated), you cannot use the loss to offset capital gains from other investments; municipal bond gains and losses are in a separate tax bucket. Additionally, interest paid by munis can be added back to income for purposes of calculating net investment income tax (NIIT) on high-income earners under current law, so even tax-exempt interest is not entirely sheltered.

How HMOP has evolved

Municipal bond markets have experienced significant volatility since the 2008 financial crisis and especially after the 2020 pandemic shock to municipal budgets. Hartford has managed through multiple cycles of rating changes, defaults, and credit recoveries. The fund’s ability to compound returns over these cycles depends on whether managers correctly identified “fallen angels” (bonds that were downgraded but later recovered) and avoided true defaults. A review of HMOP’s performance relative to peer actively managed muni ETFs and relative to a passive muni index over 3–5 year periods shows whether Hartford’s credit work is adding value net of fees.

How to research HMOP

Start with Hartford Funds’ fact sheet, which will show the current credit profile (how much is investment-grade vs. below-investment-grade), the maturity structure, and the largest sector and issuer exposures. The fund’s prospectus details the strategy and the team managing it. Compare HMOP’s yield to other municipal bond ETFs and to a broad muni index; higher yield is the fund’s promise, but it is only valuable if defaults remain below the expected yield pickup. Review the fund’s 3–5 year return versus its benchmark; active management is justified only if it beats index-tracking alternatives by enough to cover the fee. Watch municipal bond market commentary in financial media for coverage of the fund’s largest credit positions and any signs of deterioration; if a major issuer in HMOP’s portfolio faces a budget crisis, the bond’s market price may fall sharply even before any rating agency action.