Rate cut expectations and a bout of equity market turbulence have led muni bonds and related ETFs to perk up.
That’s good news for conservative income investors. But the asset class could be best approached with the benefit of active management. ETFs such as the Eaton Vance Intermediate Municipal Income ETF (EVIM) deliver on that front. The fund could be one of the municipal bond ETFs to consider over the remainder of this year and into 2025.
The reasoning for that assertion is simple. The current interest rate climate and related expectations for rate cuts could be indicators that active management has a window of opportunity to outshine passive muni strategies. Additionally, active managers can more swiftly seize upon credit and value opportunities than index-based muni bond rivals.
Growing Case for Active, Muni Bond Pairing
Municipal bonds and ETFs such as EVIM are intended to be long-term assets and should be viewed through that lens. But there are near-term reasons to consider the benefits of active management.
“We believe that some near-term caution is warranted, especially given the magnitude of the recent rally in interest rates and corresponding boost to performance,” observed BlackRock. “Seasonal supply-and-demand dynamics are expected to turn less favorable in the autumn. [And] upcoming event risks should spur heightened volatility. Amid this backdrop, we look to raise cash and lock in some gains in advance of potential better opportunities in the months ahead.”
There’s another reason active management can be beneficial in the muni bond space. That is that revenue trends aren’t linear across states and cities. Many passive muni bond indexes are heavily allocated to the largest issuers of these bonds. Those include California, Illinois, and New York. Translation: revenue trends are strong in some states, middling in others, and trending the wrong way in others.
Public pension liabilities could loom large if the economy weakens or if equity markets turn sour. That’s another trend that isn’t uniform across states. Actively managed muni ETFs such as EVIM can more ably navigate related risks than index-based rivals.
“Government efforts to lower assumed investment return rates, reduce pension generosity, and increase contributions have also played a role in this improvement. However, states and local governments that manage significant pension assets or those that are making historically large contributions are most vulnerable to market volatility and budget pressures, which can negatively impact their credit quality,” added BlackRock.
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