History tends to repeat itself and if that’s the case in the current economic environment, then investors may want to side with muni bonds. American Century offers a pair of attractive, low-cost exchange traded fund options that allow for this exposure.
With high interest rates hampering the prospects of global economic growth, investors are pumping the brakes on riskier assets.
“We are in a low growth environment in the US. In Europe we are probably already in recession. We are in an environment where investors will demand more risk premium to own credit,” said Karim Chedid, head of investment strategy for BlackRock’s iShares arm in the EMEA region, per a Financial Times report. “Valuations are not cheap and that is driving some of the de-risking.”
That de-risking, in turn, should open up opportunities for municipal bonds. While the default move has been to pile into the safety of Treasury bills, it’s an opportune time to take advantage of munis, especially given their historical performance versus T-bills after a rate pause.
“Still doing “T-bill and chill”? As a strategy, rolling Treasury bills may have worked well so far this year, but history suggests it’s time for municipal bond investors to get off the sidelines and back into the market—and soon,” an AllianceBernstein analysis suggested, noting that over seven U.S. Federal Reserve interest rate cycles, a Fed pause (like the most recent one) was followed by muni bonds dramatically outperforming T-bills (after taxes) over the next year.
“And with municipal yields at their highest levels in 15 years, credit spreads wide and relative valuations cheap, we believe today’s muni market presents an exceptional opportunity,” AllianceBernstein added
2 Low-Cost, Active Muni Options
To take advantage of potential upside in munis, active ETFs can allow for portfolio adjustments on the fly. 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 features an expense ratio of 29 basis points. This should appeal to 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 uses 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 analysis, visit the Core Strategies Channel.
