Spring is just around the corner, and with it comes a much less exciting event — tax season. Still, advisors have to be aware of the best ways to mitigate the impact of the tax bill for clients, whether in the near term or looking ahead to the end of 2023 itself. That presents an opportunity to revisit diversified muni bonds in an ETF like the (TAXF ), which has performed well despite a volatile year so far.
Before getting into the benefits of muni bonds themselves, it’s important to note the value of the ETF wrapper in tax season compared to mutual funds. Mutual funds tend to incur more capital gains year over year, while the ETF wrapper limits those gains until the shares are sold.
That offers ETF shareholders more time to compound their gains before facing that tax bill, and with the transparency and active management offered in an ETF, managers can apply strategies like tax-loss harvesting to minimize distributions.
Combine that with diversified municipal bonds, and the ability to mitigate tax impacts grows. Muni strategies have performed well as they’ve bounced back from a tough 2022, with local governments flush with cash thanks to strong revenues and Federal government support. According to YCharts, muni national long and muni national intermediate term ETFs have returned 2% and 1.6% respectively on a YTD basis.
For more on muni ETFs, read: Bull vs. Bear: A Town Hall On Muni ETFs
Thanks to the tax free nature of most muni bonds on top of those returns, they make for a solid and stable investment amid such an uncertain U.S. market defined by an ongoing fight against inflation and a simmering banking crisis. TAXF, which actively invests in both investment-grade and high-yield municipal bonds, uses these tax-free or tax-limited and diversified municipal bonds in such a way that makes it appealing especially to higher earners.
TAXF charges 29 basis points for its exposures, and has outperformed its ETF Database Category Average and its Factset Segment Average on a YTD basis, outperforming the pair by 82 and 26 basis points respectively.
Advisors have options to consider right now in the ever-growing world of ETFs, but bonds have been a standout, and by looking to diversified muni bonds, they can offer clients tax mitigation strategies worth flagging. With strategies focused on income coming down the pipe that can also help buoy portfolios, now may be a good time to keep an eye on TAXF and how it performs in the weeks and months ahead.
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