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Municipal bond exchange traded funds have been performing quite well over the past few years as investors sought yield options beyond Treasuries. However, muni bond investors should expect lower returns in 2013, according to BlackRock (NYSE:BLK).

Peter Hayes, BlackRock's head of muni debt, expects municipal bonds to generate lower returns in 2013 than the prior two years, as yields hit a 47-year low, Bloomberg reports. Bond yield and price have an inverse relationship, so a falling yield corresponds with higher prices.

Yields on municipal debt have dropped as investors sought safe-haven diversification beyond Treasuries and a tax-free investment ahead of the federal tax increases.

According to the Bank of America Merrill Lync index, munis gained 18% in the last two years combined, the most since the 2000-2001 period.

Municipal bond investors "have been spoiled with some pretty robust total returns for an asset class that's not typically known for that," Hayes said in the article.

Hayes now suggests that investors should avoid longer-maturity bonds and trade lower-rated debt for securities with higher grades.

High-yield municipal bond ETF options include:

  • Market Vectors High Yield Municipal Index ETF (NYSEARCA:HYD): 4.66% 30-day SEC yield; up 13.2% over the past year
  • SPDR Nuveen S&P High Yield Municipal Bond ETF (NYSEARCA:HYMB): 4.20% 30-day SEC yield; up 14.2% over the past year

Broad municipal bond ETFs include:

  • iShares S&P National AMT-Free Municipal Bond Fund (NYSEARCA:MUB): 1.61% 30-day SEC yield; up 2.1% over the past year
  • SPDR Nuveen Barclays Municipal Bond ETF (NYSEARCA:TFI): 1.68% 30-day SEC yield; up 4.5% over the past year

Max Chen contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.