It’s certainly no secret that municipal bonds enjoyed a relatively strong performance in 2024.
That being said, the question remains: how will munis stack up against other fixed income categories in 2025? The good news there is that a number of economic factors may be buoying tax intake for municipalities.
The state of play for muni credit quality was recently discussed in Schwab’s 2025 Municipal Bond Outlook. In the outlook, the Schwab team broke down the factors working in favor of municipal tax intake.
“Overall, the economy continues to remain resilient, with gross domestic product hovering in the 3% area, the unemployment rate low relative to history, and home prices having risen dramatically since the onset of COVID-19,” the Schwab team noted. “This is all supportive of tax revenues for many municipalities.”
The Schwab report also notes how a wide number of states have bolstered their liquidity through maintaining reserve funds. Schwab cites data from Pew Charitable Trusts showing that, as of 2023, at least 34 states could function for over 100 days solely using reserve cash.
Even though there’s some fiscal aid headwinds to be mindful of, the current U.S. economy is largely working in favor of municipalities. As such, it could be prudent to build up one’s exposure to muni bonds in the near-term.
EVSM Can Offer Broad Muni Exposure
One of the more efficient ways to gain muni bond exposure is through an actively managed ETF. For instance, take a closer look at the Eaton Vance Short Duration Municipal Income ETF (EVSM ).
With a lower net expense ratio of 19 basis points, EVSM provides diversified exposure to a variety of municipal bond sectors. By sticking with wide sector exposure, the fund can capitalize on the variety of factors broadly pushing municipal tax revenues upwards.
Managed by the fixed income experts at Eaton Vance, EVSM offers an average portfolio duration of a little more than two years. This duration can let investors tackle short-term muni momentum without the risks of long-term interest rate changes.
For more news, information, and analysis, visit The ETF Yield Channel.
