In a macroeconomic environment subjected to rising yields, muni bonds can offer both yield and the stability of quality debt. Furthermore, both are achievable using one exchange traded fund: the American Century Diversified Municipal Bond ETF (TAXF ).
Municipal bonds are imperative when it comes to building out the infrastructure of cities. Thus far, more projects are developing in 2023 despite the rising tide of interest rates. As mentioned, however, this provides fixed income investors with an opportunity to capitalize on attractive yields offered by munis.
“Municipal bonds are the crucial tool cities use to finance essential projects — accounting for nearly 70% of all financing for public infrastructure like roads and water and sewer utilities,” said the National League of Cities (NLC), an organization comprising city, town, and village leaders with the focus of improving the quality of life for their respective residents. "’New-money’ bond sales for essential projects have ramped up in the second half of 2023, and the trend is expected to continue in 2024, driven in part by the need to raise matching funds to unlock Federal infrastructure grants.
“While the municipal bond market remains flexible and responsive to cities’ needs, the higher interest-rate environment means local leaders may need to work harder to attract investors to their projects and keep the cost affordable,” the NLC added.
Why Adding Muni Bond Exposure Appeals
Diving into the vast universe of options can be especially daunting. This can be made easier with TAXF, as it uses an active management strategy. That puts the onus of research and hand-picking of muni bond holdings on experienced portfolio managers.
Per its baseline fund description, TAXF seeks to provide consistent tax-free income by employing an active, research-driven process that draws from across the municipal bond universe and adjusts exposure depending on prevailing market conditions. As with local government bonds in the U.S., credit risk is minimized. Over 80% of the fund range in debt rated at AAA to A (as of September 30).
The fund also features a low expense ratio of 29 basis points, which is competitive given its active management component. This should appeal to cost-conscious investors who may typically view actively managed funds as too expensive to consider.
To extract more yield, the fund can opt for high-yielding instruments in the municipal bond market. The 30-day SEC yield stands at 3.91%, with a 2.85% 12-month distribution rate (both as of September 29).
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