In the current fixed income environment, muni bonds are offering a sought after combination of yield and credit quality. One option that may be worth considering is the Fidelity Systematic Municipal Bond Index ETF (FMUN ).
As the Wall Street Journal noted, munis are also offering investors relative value. According to numbers from the Securities Industry and Financial Markets Association, historically high issuance last year increased the supply of munis, thereby applying downward pressure on prices. Fast forward to today, and high issuance during the month of July means more munis are flooding the market, keeping prices down and thus, offering relative value to fixed income investors.
That value is inherent in, first and foremost, income that is exempt from federal tax. As the WSJ also noted, the highest quality munis were offering yields as high as 4.74% in April via the ICE U.S. Muni AAA 30-year gauge. While they have come down slightly since (4.56%), they are still at historic levels. When you combine that with exposure to safer haven income derivation from local governments versus businesses via taxable corporate bonds, they also provide quality income with a lower credit risk profile.
Given all these reasons, the question now is: Where is an ideal place to take advantage of munis to maximize the current opportunity?
A Systematic Approach to Munis
The advent of ETFs have given retail investors a plethora of options when it comes to getting muni exposure. In a vast pool of individual muni options, ETFs can provide broad-based exposure in the convenience of a flexible investment vehicle. With that, investors have plenty of options to mull, but what discerns FMUN from the masses is its systematic approach to munis.
This is inherent in the index it tracks — the Fidelity Systematic U.S. Municipal Bond Index. The strategy emphasizes investment grade muni bonds that offer attractive risk-adjusted performance and liquidity, then chooses the bonds that exhibit these top quality characteristics when compared to traditional market-capitalization weighted U.S. investment grade municipal bond indices.
The fund employs statistical sampling techniques that look at a bond’s duration, maturity, interest rate sensitivity, security structure, and credit quality. The simple set-it-and-forget it approach by tracking an index means investors also get quality exposure at a cost effective expense ratio — 0.05% or $5 per every $10,000 invested. The fund is deeply diversified, with over 1,100 holdings, and carries a 30-day SEC yield of 3.84% (as of August 8).
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Fidelity Investments® is an independent company unaffiliated with VettaFi LLC (“VettaFi”). These articles do not form any kind of legal partnership, agency affiliation, or similar relationship between VettaFi and Fidelity Investments, nor is such a relationship created or implied by the articles herein. VettaFi LLC is the author and owner of these articles.
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