John Miller isn't quitting tobacco bonds, but the growth of electronic cigarettes means he might get burned.

Mr. Miller, co-head of fixed income at Nuveen Asset Management LLC, which oversees about $90 billion in municipal bonds, is among those buying even as a steeper-than-forecast drop in smoking and the increased popularity of e-cigarettes threaten the revenue that backs the securities. In 1998, tobacco companies agreed to settle lawsuits by paying states to offset the health-care costs of smoking, with the payments based...