Amid a volatile stretch for equities, muni bonds and related ETFs could garner renewed attention as shelters from the risk asset storm.
Just look at the ALPS Intermediate Municipal Bond ETF (MNBD ), which is higher by almost 1% year to date. No, municipal bonds will not outperform stocks over the long haul. But munis or ETFs such as MNBD could be sound ideas for investors looking to balance equity-heavy portfolios while bringing volatility-reducing, income-generating assets into the fold.
And while munis aren’t known for thrills, that trait could be alluring in the current market climate. That’s particularly so when coupled with MNBD’s status as an actively managed ETF. That could enable the fund’s managers capitalize on credit and duration opportunities.
MNBD Catalysts Abound
While risk assets are currently retreating, the news flow is considerably brighter for municipal bonds. For example, Republican members of the House Ways & Means Committee — the committee tasked with advancing President Trump’s tax cut agenda — said the tax benefits enjoyed by municipal bondholders will remain in place.
That’s significant because those tax perks are among the primary reasons some investors embrace munis. And that’s particularly true of affluent market participants in high-tax states. Speaking of tax breaks, even when accounting for those perks, the implied yield for many individual muni issues is 7%. That figure is historically noteworthy.
“For U.S. taxpaying investors able to lock in muni bond yields now, this advantageous moment extends across maturities to varying [degrees … Our] research here is a historical study of investment outcomes for one- and two-year periods since 1980 for investors who bought into the market at those times when yields breached 7%,” according to J.P. Morgan Private Bank.
Another reason to consider municipal bonds or ETFs such as MNBD is because the asset class has a reputation as an inflation fighter. That’s relevant today because inflation is proving stickier than expected.
“Interestingly, during the high inflation period between 1980 and 1990, both the shorter-dated Municipal Bond Index and the Municipal 22+ Long Index even outperformed equities—the S&P 500, Dow Jones Industrial Average and the Russell 2000, when calculated using the highest bracket tax rate (40.8%), and again factoring in the break for U.S. taxpayers,” added J.P. Morgan Private Bank.
MNBD, which allocates about 78% of its weight to revenue bonds, has outpaced the Bloomberg Municipal Bond 1-15 Year Blend Index since it came to market in May 2022.
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