Something strange appears to be going on with municipal-bond exchange-traded funds. The two largest ETFs in the category have had very different performances for the year to date. IShares S&P National AMT-Free Municipal Bond (MUB) has returned 4.90% this year. Its main competitor, SPDR Nuveen Barclays Capital Municipal Bond (TFI), has returned only 2.19%. Both ETFs track investment-grade municipal bonds, have similar yields and durations, and have fees that are within 2 basis points. From a holdings perspective, the only material difference is the slightly higher credit quality of TFI, but even that difference is negligible.

Why would similar funds have such different results and what should investors do? Upon further investigation, we find that what appears to be strange is in fact what we should expect, and the course of action is simple.