The ETF wrapper’s ascendancy in the investing landscape has empowered asset managers to provide more and more creative solutions to portfolios. Active ETFs in particular have proven to be a popular canvas for asset managers looking to design new solutions to meet investor and advisor goals. Active, tax free ETF solutions can leverage fundamental research suites like those at T. Rowe Price and produce big results.
Key Takeaways:
- Active ETFs have become a huge part of the overall investing landscape in recent years.
- ETF innovation has also produced more and more ETFs reducing or eliminating tax exposure with that active bent.
- Tax-free ETF strategies with an active approach can play a catalyzing role in fixed income holdings.
By using active, fundamental research-driven approaches, investors can outperform and get more out of traditionally quieter segments, like municipal bonds. Tax-free ETF solutions that actively invest therein can assess issuers to find the right mix of bond holdings.
For example, T. Rowe Price offers a variety of municipal bond ETFs that invest in tax free, income-generating debt. The active ETF experts recently launched a pair of new muni income ETFs. The T. Rowe Price Long Municipal Income ETF (TMNL) and the T. Rowe Price Short Municipal Income ETF (TMNS) arrived in November and target tax-free ETF income.
TMNL actively invests in munis, including certain derivatives, to generate tax-free income. Typically with a weighted average maturity greater than 10 years, it tends to hold a variety of muni bonds from general obligation to private activity bonds. Up to 25% of those holdings may be below investment grade. Its active managers assess factors like credit quality, rates, and overall economic outlook in addition to proprietary issuer research.
TMNS invests similarly, instead looking to debt with a maturity of five years or less. TMNS charges an 18 basis point (bps) fee, while TMNL charges a 26 bps fee. As of April 30, TMNL provided a 4.65% yield to maturity. TMNS meanwhile provided a 4.35% yield to maturity as of the same date, per T. Rowe Price data.
See more: This Fundamental Active ETF Is Spiking Ahead of Key Milestone
That active approach can produce some robust yields, while also reducing overall tax payments for a portfolio. When adding those funds’ impact up year over year, too, investors can start to see some serious results. Over time, compounding savings from reduced taxes and reinvesting those savings and income into equities could help portfolios take big leaps. Funds like TMNS and TMNL, playing satellite roles, could prove a shrewd medium- to long-term play to fill that role.
For more news, information, and analysis, visit our Active ETF Content Hub.
