There are scores of municipal bond ETFs on the market today, many of which are cost-efficient, straight-forward, passive funds — hallmarks advisors and investors look for. However, munis are also conducive to active management. This indicates that market participants could derive benefits from ETFs such as the ALPS Intermediate Municipal Bond ETF (MNBD ). MNBD, which turned three years old last month, could be in the right place at the right time, because advisors and fixed income investors increasingly embrace actively managed bond ETFs.
That groundswell of support includes muni ETFs, because the union of active management and municipal bonds can be additive to long-term returns. Meanwhile, it offers market participants exposure to approaches more selective on credit and valuation.
MNBD Ready for Its Close Up
As noted above, benefits are associated with both active and passive muni ETFs. With the latter, investors can access hundreds, even thousands of bonds under a single umbrella, often at low costs. However, many index-based muni strategies introduce other forms of risk. Those include duration risk and too much concentration in bonds issued by a smaller number of states.
Owing to its status as an actively managed fund, MNBD can avoid those potential headwinds. This underscores why the ETF could merit further examination.
“In our view, active investing and fixed income are a natural fit, and this also applies to the Muni market, which is complex and contains over 1 million separate CUSIPs from over 50,000 issuers,” noted Goldman Sachs Asset Management (GSAM).
GSAM mentioned yield curve positioning and income among the reasons why active management and municipal bonds pair ideally. That could bode well for future adoption of MNBD and the ETF’s long-term returns.
“Credit opportunities can be fleeting, therefore an active approach to security selection and determining the right environments to dial up and down credit risk within portfolios is essential,” added GSAM. “A static and passive approach that is followed by index-based strategies may not be an optimal way of capitalizing on this unique and idiosyncratic market.”
MNBD’s geographic diversity is also noteworthy. As GSAM points out, bonds from issuers in New York, California, Texas, Florida and Illinois dominate many passive muni funds. However, only Illinois has beaten the national average in recent years.
MNBD’s lack of dependence on California and New York debt is relevant for another reason. The often-strong demand for munis courtesy of issuers in those states suppresses yields on those bonds, according to GSAM.
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