Key Takeaways:
- Active ETFs have helped unlock fixed income strategies in recent years.
- Muni bond interest has grown at the same time as investors look to reduce bills.
- Munis may be able to build on a strong turnaround in 2025.
Muni bonds may not always be the most exciting part of a portfolio, but they often play a very important role in reducing tax bills. This year has been very volatile for investors so far, too, making saving a bit here and there on those bills potentially even more important.
Understanding municipal bonds, and why active investing can unlock them, is the name of the game. Active ETFs, which have exploded in popularity since the ETF rule arrived in 2019, offer tax efficiency, flexibility, and liquidity. Perhaps most importantly, they can provide a deep, fundamental research-driven view into individual issuers.
Municipalities may be under greater pressure currently, following record high issuance in 2025. Thus, parsing the growing number of available muni bonds becomes a critical requirement for competitive funds. That’s another place where active ETFs can step in.
According to American Century Investments, 2026 may see credit spread widen, while the muni yield curve will potentially steepen. Per analysis by American Century Investments Senior Portfolio Manager Joseph Gotelli and Senior Director, Product Management Greg Torretti, the muni market will “generally” see the coupon interest rate provide most of the total return for 2026.
The American Century Diversified Municipal Bond ETF (TAXF ) charges a 27 basis point fee to actively invest in muni bonds. The fund combines high-yield and investment-grade bonds to pursue that income, with the fund returning 4% over the last 12 months per ETF Database data. With a 3.69% 12-month distribution rate as of February 27, its combination of income, tax relief, and performance potential may make it a an option within the muni bond space.
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