Like other corners of the fixed income market, municipal bonds didn’t set the investing world ablaze in the first quarter. Some market observers believe there’s no opportunity in the asset class often considered to be a conservative income investor’s friend. Still, advisors and investors may want to consider the benefits of active management with municipal debt. The American Century Diversified Municipal Bond ETF (TAXF ) is among the ETFs that marry active management and munis. That combination may be appealing at a time when some experts believe municipal bonds are offering value.
Read more: High Yield Munis Useful for Diversification, Extra Income
There are other reasons to consider the $616.6 million TAXF, which turns eight years old in September. As an active ETF, TAXF, which attempts to beat the widely followed S&P National AMT-Free Municipal Bond Index, can be flexible. That’s relevant at a time when states’ fiscal positions aren’t linear.
“Nevertheless, most municipal credits enter this period from a position of strength. State reserves are trending lower but remain well above pre-pandemic levels — a meaningful buffer against future pressures,” noted American Century. “States continue to be the anchor of stability, and their posture ripples through local governments, schools, transportation and health care.”
Getting Tactical With TAXF
TAXF has an option-adjusted duration of 6.2 years and holds 714 bonds, confirming broad coverage of the intermediate-term municipal bond segment. That breadth could be appealing to end users amid expectations that muni bond supply could be somewhat tight this year.
“Net supply might be tighter, given higher muni refinancings and some pre-funding from the previous year,” added American Century. “Additionally, the mounting cost pressures that issuers face directly influence the supply picture. For example, urban interstate construction costs climbed from approximately $8 million per mile in 2018 to more than $12 million per mile by 2023.”
Demand, due in part to ETFs like TAXF, is proving sturdy, as advisors assess intermediate-term income-generating assets. Put it all together and the current environment is conducive to active management, with municipal bonds indicating TAXF is an ETF income investors should monitor going forward.
“We expect 2026 to feature robust supply, solid total return potential and sector-specific opportunities and risks,” concluded American Century. “We’ll continue to monitor the economic environment, including the implications of a persistent K-shaped economy, tariff policy uncertainty and lingering inflation. Monetary policy uncertainty and an evolving fiscal landscape will also shape market dynamics.”
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