The bond market is massive. That sprawl compels many investors to embrace aggregate bond funds for the fixed income portions of their portfolios. However, more tactical approaches can be rewarded.
Conservative investors can get tactical with fixed income municipal bonds and related ETFs, including the ALPS Intermediate Municipal Bond ETF (MNBD ). Year-to-date, municipal bonds are scuffling, but the actively managed MNBD is outpacing the Morningstar US Municipal Bond Index.
Relevant in the municipal bond conversation is the fact these bonds are highly suitable for long-term, risk-averse investors. On that note, it’s worth pointing out that muni bonds have ranked among the top four corners of the fixed income market in five of the past 10 years. In several of the years in which munis were further down the rankings, it was the result of bull markets for bonds. That encouraged investors to embrace riskier fixed income assets.
MNBD Taps Into Muni Advantages
Past performance isn’t a promise of future returns. But munis have an enviable track record of holding up well, performing less poorly in times of bond market duress. As an actively managed ETF, MNBD can potentially accentuate that situation. That’s because it can more nimbly move away from bonds that are most vulnerable to macroeconomic shocks.
Munis “lost less than most of the taxable indexes in 2022, when the Federal Reserve responded to generationally high inflation by jacking up interest rates seven times by a total of 4.25 percentage points, sending prices on existing bonds plummeting,” noted Morningstar’s Dan Lefkovitz.
As is the case with other parts of the bond market, there are trade-offs with munis. Investors buying individual issues or ETFs such as MNBD are likely to find lower yields. But on the upside, default risk and volatility are often lower than what’s found in higher-yielding parts of the fixed income arena.
“Munis’ stable underlying revenue streams provide some protection from economic downturns that hit bonds with more credit risk, like bank loans, high-yield, and emerging markets,” added Lefkovitz.
Munis and funds like MNBD are pertinent for another reason: They can add much-needed diversification to equity-heavy portfolios. That’s a trait that can be helpful to long-term investors.
“Beyond short-term swings, it’s important to note that municipal bonds offer similar diversification benefits to their taxable counterparts,” concluded Lefkovitz. “Investors can use investment-grade munis the same way they would a core bond allocation. They damp[en] portfolio-level volatility and provide income.”
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