Columbia Multi-Sector Municipal Income ETF (MUST)

The Columbia Multi-Sector Municipal Income ETF (MUST) is an exchange-traded fund that invests in municipal bonds issued by diverse public agencies and institutions across the United States. Municipal bonds are debt instruments issued by states, cities, counties, school districts, and special-purpose authorities to finance infrastructure, public services, and capital projects. MUST holds a broad portfolio of these bonds, offering investors a stream of income that is exempt from U.S. federal income tax — a powerful advantage for those in higher tax brackets — while maintaining diversification across sectors and credit qualities.

Why municipal bonds exist and who borrows

Every year, thousands of public agencies need to raise capital: a city to upgrade its water system, a state to fund a highway, a school district to build a school, a hospital authority to add a wing. Rather than wait for appropriated tax dollars, these institutions issue bonds — they borrow money from investors and promise to repay it with interest over a set period, typically ten to forty years. Unlike corporate bonds or Treasury debt, the interest paid on municipal bonds is exempt from federal income tax, and often from state and local taxes if you live in the issuing state.

This tax exemption exists by design: Congress created it to make public borrowing cheaper. Lower yields attract more buyers, which lowers the cost to municipalities, which ultimately makes public projects more affordable. The trade-off is that municipal bond yields are lower than those of taxable bonds with comparable credit risk — an investor buys tax exemption, not superior returns.

What MUST holds: sector diversity and credit quality

MUST’s strategy is to hold municipal bonds issued across many different sectors and credit profiles. A typical portfolio might include bonds issued by state general-obligation authorities (the state itself borrowing), city and county bonds, school-district bonds, hospital and university bonds, transportation authorities, utility authorities, and special-district authorities. This sectoral spread prevents the fund from being hostage to a single public borrower or a single type of public project.

Credit quality varies within the portfolio. Some holdings might be from highly rated, wealthy jurisdictions (a California highway authority or a New York utility) while others come from smaller towns or less fiscally stable regions. MUST’s managers aim for a portfolio that blends higher-credit-quality bonds (which are safer but yield less) with lower-rated municipals (which offer higher yields but carry more risk of default or price swings). The mix is a judgment call by the fund’s management about which risks are worth taking for a given yield target.

The tax-exemption mathematics

The appeal of MUST hinges entirely on taxes. A municipal bond yielding 3% that is tax-exempt is worth more to someone in the 35% federal income-tax bracket than a corporate bond yielding 4% that is fully taxable. After federal tax, the corporate bond nets 2.6%; the municipal bond nets the full 3%. The higher your tax bracket, the more attractive the swap becomes.

For someone in a lower tax bracket or someone holding the bonds inside a tax-deferred retirement account (where the tax exemption offers no benefit), MUST is not a competitive vehicle — they would be better off in a higher-yielding taxable bond fund. MUST is expressly designed for high-income earners in taxable accounts who stand to save substantially on federal taxes.

State and local tax exemptions add another layer: if you buy a municipal bond issued in your home state, you typically owe no state or local income tax on the interest either. This makes in-state municipal bonds even more attractive for state-taxed residents in high-tax states. MUST, being national in scope, will include some in-state bonds (which offer maximum tax benefit) and many out-of-state bonds (which offer federal exemption only). The tax benefit varies by holding.

Interest-rate risk and credit risk

Like all bond funds, MUST’s share price moves inversely to interest rates. If the Federal Reserve raises rates, new municipal bonds will be issued at higher yields, making existing MUST holdings — which promise the old, lower yields — less valuable. A shareholder who needs to sell before maturity might see a loss. Conversely, if rates fall, existing bonds become more attractive and the fund’s share price rises.

This interest-rate risk is particularly acute for longer-maturity bond funds. MUST’s average maturity — the weighted average time to repayment of its holdings — determines how sensitive the fund is to rate moves. A portfolio of 5-year bonds will bounce less than one of 20-year bonds if rates rise by 1%.

Credit risk is the second major concern. If a municipality faces fiscal distress — a major employer leaving town, a pension fund imploding, a tax base eroding — bondholders may not be repaid in full. Defaults are rare in the municipal market (lower than corporate default rates historically), but they do happen. MUST’s diversification across hundreds of issuers helps, but concentration in a few weak credits could hurt returns if those credits default or are downgraded.

Market dynamics and the secondary market

Municipal bonds trade in a less transparent secondary market than stocks or Treasury bonds. MUST’s daily share price is set by supply and demand for the fund’s shares themselves, but the underlying bonds trade more sparsely. This can mean that MUST’s share price occasionally drifts from the true market value of the bonds it holds — though active management and regular rebalancing attempt to keep the divergence small.

Liquidity risk also applies: if you need to sell MUST shares in a crisis, you can do so during market hours, but the price you receive reflects what the market will pay that day. For buy-and-hold investors seeking predictable income, this is usually fine. For traders or those who might need quick exit, it is a consideration.

How to research MUST

Start with Columbia Investments’ fact sheet for MUST, which lists the fund’s current yield, average maturity, average credit quality (usually expressed as a blend of rating-agency grades), sector allocation, and expense ratio. Understand the average maturity: a fund with a 10-year average maturity will be much less volatile than one with a 20-year average, but will also offer less yield.

Review the fund’s credit-quality breakdown. What percentage of holdings are rated AAA (the safest), versus AA or A, versus BBB or below? A fund tilted heavily toward A-rated bonds is taking more credit risk than one concentrated in AAA bonds, which should be reflected in a higher yield.

Compare MUST’s expense ratio to competitors — short-term and longer-term municipal ETFs. The expense ratio is a direct drag on returns, so lower is better, all else equal.

Consider your own tax situation. If you are not in a high federal tax bracket or if you are holding the fund inside a retirement account, MUST is likely not the right vehicle — you would be better served by a taxable bond ETF offering a higher gross yield. Use an online municipal-bond calculator to determine the taxable equivalent yield and compare it to alternatives.

Finally, monitor interest-rate expectations and credit news. If the Federal Reserve is expected to raise rates, bond prices — and bond-fund share prices — will tend to decline; if rates are expected to fall, the reverse occurs. Watching the fund’s performance relative to Treasury yields and corporate bonds gives you a sense of how your municipal exposure is moving in the wider market context.