Take Advantage of These Muni ETFs Before Fed Cuts Rates

The Federal Reserve standing pat on interest rates for the time being leaves the window open for fixed income investors to take advantage of current yields. That also includes muni bond exposure, but investors may want to take advantage before that proverbial window shuts.

An Institutional Investor article cited this opportunity in municipal bonds, highlighting the yield the debt is currently offering to the institutional space. Additionally, munis offer a higher degree of quality without taking on more credit risk versus, say, corporate debt, while still maintaining attractive yields. However, yields in the municipal bond market may not stay this appealing for long.

"Muni yields reached 4.72 percent in October — the highest they had been in more than a decade — and have since fallen to 3.91 percent," the article said. "Still, munis, for now, have relatively attractive yields."

As the article reiterated, "for now" speaks to the eventual rate cuts by a data-dependent Fed. Once the central bank gets its confirmation, rate cuts will shutter that opportunity window.

“There needs to be a little sense of urgency with regards to this. Since the end of the third quarter and the beginning of the fourth quarter last year, we have been talking to clients about that sense of urgency. It’s not a market timing call necessarily, and people can confuse that,” said Robert DiMella, executive managing director at MacKay Shields.

This same opportunity also goes for retail investors. And muni-focused exchange-traded funds are an ideal way to get broad-based exposure. Active ETFs, in particular, present a compelling option, especially given their dip in costs, making them just as appealing as their passive peers.

Under the Hood of 2 Muni Bond ETFs

Active ETFs can allow for portfolio adjustments on the fly if market conditions warrant a change. This strategy is inherent in the American Century Diversified Municipal Bond ETF (TAXF), which seeks to provide consistent tax-free income by employing an active, research-driven process that draws from across the muni bond universe and adjusts exposure depending on prevailing market conditions. 

With regard to its low-cost appeal, TAXF has an expense ratio of 0.29%. This should appease cost-conscious investors who may typically view actively managed funds as too expensive to consider.

Another option, with a low expense ratio of 0.15%, is the Avantis Core Municipal Fixed Income ETF (AVMU). This fund also employs an active management strategy, so investors or advisors can minimize the amount of research necessary given the vast array of opportunities in the municipal bond market.

For more news, information, and strategy, visit the Core Strategies Channel.

Read more on ETFTrends.com.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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