As has been the case in so many other corners of the investment world, the advent and growth of ETFs has significantly improved the accessibility of municipal bonds to small investors. With their tax-exempt interest payments, municipal bonds have always been popular investment options, but investors have had to contend with certain difficulties in achieving a diversified portfolio of holdings, not to mention below-average liquidity for many issues.

By offering what is in effect instant diversification, municipal bond ETFs have found a ready-made market. Currently there are more than 30 ETFs that focus on munis, with many focusing on particular duration ranges, geographies and credit quality.

High-Yield Muni Bond ETFs

High-yield bonds are almost always popular with investors, as they have demonstrated the ability to offer enhanced risk-adjusted returns without excess risk. Investors should note, however, that with higher yields often comes higher levels of risk. But for those risk tolerant investors, here are two high-yielding ETF options:

• Market Vectors High Yield Municipal Bond ETF (HYD): This fund is linked to an index that has a 35% weighting in investment-grade BBB bonds and a 75% weighting in non-investment grade bonds. HYD s expense ratio of only 0.35% makes it as appealing as its competitor, HYMB, which charges 10 basis points higher.
• SPDR Nuveen S&P High Yield Municipal Bond ETF (HYMB): In regards to credit quality breakdown, HYMB's portfolio is quite similar to HYD's. The fund is, however, about one-fifth of the size of HYD. HYMB's underlying index includes more than than 170 individual issues, with the largest issues going to California, Florida and Colorado. A number of smaller states/territories such as Puerto Rico and Tennessee also find their way into the top 10.

All-Term National Muni ETFs

For investors who want exposure to a wide range of municipal bonds covering multiple durations and geographic regions, there are three primary options:

• iShares S&P National Municipal Bond Fund (MUB): MUB is the largest municipal bond ETF on the market, with roughly three times the assets of the second-largest fund. Its portfolio consists of over 2,100 issuers, with only 3% of total assets lying in the top 10 holdings. In addition to delivering a relatively high yield, it also boasts a competitive expense ratio at a mere 25 basis points.

• The SPDR Barclays Municipal Bond ETF (TFI): This fund is also a sizable fund, with over $1 billion in assets under management. TFI is, in many respects, similar to MUB, though it does offer a slightly lower expense ratio of only 0.20%. TFI's portfolio is also more heavily weighted to the high end of the credit spectrum, with the majority of issues holding a credit rating of AA or AAA.

• Market Vectors CEF Municipal Income ETF (XMPT): XMPT is effectively a fund of funds, as its portfolio consists of closed-end municipal bond funds. XMPT invests in roughly 80 different funds, though its top 10 holdings account for over a third of total assets. In regards to size and liquidity, XMPT is rather small with less than $25 million in total assets and an average daily trading volume below 20,000 shares. Investors should also note that the fund comes at a rather steep price tag with its expense ratio clocking in at 1.43%.

Target Duration Muni Bond ETFs

Duration is a key consideration for bond investors, not least of which for its importance in predicting the sensitivity of a bond to future changes in interest rates. Many investors use duration as a key factor in weighting their fixed income allocations, and there are many municipal bond ETFs targeted around particular duration ranges.

Short Term

Investors looking to the short end of the duration spectrum have four options: SHM, SUB, SMB and SMMU. The SPDR Barclays Short-Term Municipal Bond ETF (SHM) is one of the largest municipal bond ETFs, with over $1.6 billion in fund assets, a relatively low expense ratio at 0.20%, and relatively diverse holdings. SUB and SMB are broadly similar funds, though SMB offers a surprisingly low 0.16% expense ratio. The PIMCO Short-Term Municipal Bond Strategy Fund (SMMU), however, is distinctly different in that it is an actively-managed fund. SMMU also only charges 0.35%, far less than many other actively-managed funds.

Intermediate

There are only three ETPs in the intermediate-term fund category, which features nominal maturities of 6 to 17 years. Market Vectors Intermediate Municipal Index ETF (ITM) is a passively-managed fund, offering geographically diverse exposure to over 660 individual issues.

PIMCO's Intermediate Municipal Bond Strategy Fund (MUNI) and Columbia's Intermediate Municipal Bond Strategy Fund (GMMB) both offer actively-managed municipal bond portfolios with holdings concentrated in the 3- to 15-year maturity range. The Columbia fund, however, is more concentrated as it has about one-third the holdings of the PIMCO fund.

Long Term

There is only one long-duration ETF for investors: the Market Vectors Long Municipal Index ETF (MLN). The fund's portfolio consists of about 170 individual issues, the majority of which hold AA or A credit ratings. Investors should note, however, that long-duration bonds typically respond more dramatically to interest rate changes.

Target Date

For investors who wish to be even more particular about maturities, the iShares' lineup of target maturity date funds may be an appealing option. These funds replicate indices of investment grade AMT-free municipal bonds that mature in 2012, 2013, 2014, 2015, 2016 and 2017. Trading under the tickers MUAA, MUAB, MUAC, MUAD, MUAE, these ETPs are unlike most bond funds that reshuffle holdings as effective durations change. Instead, these funds hold muni bonds maturing in a certain year until maturity, meaning that each fund will gradually shift to cash as it approaches its maturity date.

Build America Bond ETFs

Build America Bonds are special taxable municipal bonds that were brought into existence through the 2009 American Recovery And Reinvestment Act. While these bonds are different in that they are taxable, they do carry special tax credits and subsidies. Tax Credit BABs offer a refundable tax credit to bondholders, while Direct Payment BABs offer a federal subsidy (35% of interest paid) to the issuer. In either case, the net effect to the issuer has a lower cost of issuance relative to regular taxable bonds, and in some cases, even lower than tax-exempt bonds.

It s not surprising that many investors have embraced Build America Bonds as a means of enhancing the current return portion of their portfolios. Currently, there are three ETFs offering exposure to this asset class:

• PowerShares Build America Bond Portfolio (BAB)
• SPDR Nuveen Build America Bond ETF (BABS)
• PIMCO Build America Bond Strategy ETF (BABZ)

State-Specific Muni Bond ETFs

As two of the largest states in the U.S., it is not surprising that there is a large number of municipal bonds issued in the state of California and New York. Both of these states also have large populations and large state and local tax burdens, giving investors in these states even more reason to consider municipal bonds.

It is important to keep in mind that financial conditions for states can change quite drastically (consider, for instance, the impact of the Bakken oil boom on North Dakota). While California's budget and state debt issues have figured prominently in the news in recent years, it is still a very large economy and home to many innovative and growing companies. Consequently, investors need to stay up-to-date with the latest economic and political developments in these states.

Investors should also note that while there are only state-specific municipal bond ETFs for California and New York, there are publicly-traded closed-end funds that cover other states. For investors looking for California muni exposure, there are three options: CMF, CXA and PWZ. And for New York munis, investors can choose from NYF, PZT and INY. It's also worth noting that Invesco PowerShares' PZT features exposure to insured bonds.

Pre-Refunded And Insured Muni Bond ETFs

Pre-refunded and insured muni bond ETFs offer investors lower-risk alternatives. Insured bonds are fairly straightforward the issuer buys insurance from a commercial insurance company that promises to pay the principal and sometimes the interest if the issuer defaults. Pre-refunded bonds, however, are a bit more complex; the issuer puts funds in escrow to be used to call the bonds at the first allowable call date. Because the escrow funds are usually invested in Treasuries, the pre-refunded bonds carry nearly the same sort of risk, but with a slight incremental yield/return advantage.

The only pre-refunded bond fund is the Market Vectors Pre-Refunded Municipal Index ETF, PRB. On the insured side, there is the aforementioned PZT, as well as Invesco PowerShares' Insured National Municipal Bond Portfolio (PZA).

Disclosure: No positions at time of writing.