California isn’t just the largest state by population. It’s the largest issuer of municipal bonds, presenting its residents and fixed income investors all over the country with an array of opportunities.
So large is the California municipal bond market that some ETFs are dedicated to Golden State municipal debt. However, this is an example of a municipal bond segment where advisors and investors need to be selective. The American Century California Municipal Bond ETF (CATF ) makes it easy to accomplish that goal.
CATF, which turns two years old in July, endeavors to generate robust income exempt from both federal and California taxes. That indicates its utility goes beyond that of investors residing in California. That said, California’s notoriously elevated taxes on high brackets could make this fund appealing for affluent, income-hungry residents of the state.
Make the CATF Call
CATF, which holds 261 California muni bonds, is actively managed, and that management style could benefit investors due to the sheer expanse of the state’s municipal bond market. Said another way, a comparable index-based strategy may hold more bonds than CATF, but quantity isn’t a promise of better outcomes for investors.
CATF can leverage active management to unearth the best opportunities in the massive California muni market while also potentially helping investors capitalize on credit, interest rate and value opportunities. Active management can also steer investors away from issues faced by financially strained municipalities. That’s a good thing, because market participants often embrace munis due in part to low default rates.
“Municipal bonds have a history of significantly lower default rates than taxable corporate bonds with the same credit quality rating. A comparison of muni bond default rates versus similarly rated taxable bonds shows this result holding up historically since the 1970s through 2024,” according to American Century.
There’s more to the CATF story, including the fact that over extend holding periods, municipal bonds have generally delivered positive returns. Additionally, these bonds, and ETFs such as CATF, can act as wealth preservation tools.
“Many investors want to preserve the capital they invest, as well as gain some growth. Munis have historically answered the call,” added American Century. “During periods of extreme stock market stress, municipal bonds balanced broad market declines.”
Municipal bonds, including when accessed via the ETF wrapper, can also diversify portfolios, because these bonds typically have low correlations to junk corporate debt and domestic stocks. CATF charges 0.27% per year, or $27 on a $10,000 investment.
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