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Exchange-Traded Funds and Municipal Bond Market Transparency

This paper examines the effect of exchange-traded funds' (ETFs) daily holding disclosure on the pricing and trading of municipal bonds. Bonds held by ETFs are found to have significantly smaller price dispersion than similar, non-ETF-held bonds. The effect is stronger for retail trades than for institutional trades, on bonds associated with high uncertainty and in stressed markets, suggesting ETF holding disclosure benefits more when information is scarce. ETF-held bonds are also more liquid and associated with higher trading activity. I further document lower dealer's markup and inventory imbalance in markets of ETF-held bonds -- an indication of higher customers' bargaining power resulting from improved pre-trade transparency. ETF effects also spillover to the primary market, as when a municipality has outstanding bonds held by ETFs, its newly issued bonds have lower yield, higher price, and lower price dispersion. Overall, my findings indicate that ETF information disclosure is an important channel through which investors can gain additional insight into the pricing of municipal bonds.