Municipal bonds have long been revered by income investors for low credit risk and certain tax benefits. While those are generalized pluses, there are instances where active management can better-serve investors in this asset class.
That’s the idea behind the newly minted First Trust New York Municipal High Income ETF (NYSE Arca: FMNY). FMNY, the latest actively managed exchange traded fund by First Trust, debuted last week. As its name implies, FMNY holds bonds issued by the fourth-largest U.S. state, as well as municipalities in that state.
The new FMNY ETF also offers tax perks as its generated income “is exempt from regular federal income taxes and New York income taxes,” according to First Trust.
The tax-advantaged status of municipal bonds is all the more relevant at a time when the White House is proposing significant increases to capital gains taxes.
It remains to be seen whether or not Congress can pass the proposed tax hikes, but market observers believe if those higher levies come to fruition, investors will seek more tax-beneficial strategies and pour into exchange traded funds, which are more tax-efficient than most actively managed mutual funds. Both scenarios could benefit the new First Trust ETF.
“For investors in higher tax brackets, municipal bonds can offer greater after-tax yields than taxable debt securities of similar maturities and credit quality, including Treasuries and corporate bonds. Taxable equivalent yields represent the amount of pre-tax return an investor would need to earn in a taxable investment in order to equal that of a tax-exempt investment,” notes First Trust.
FMNY has other perks in store for investors. As an active fund, it can blend investment-grade and junk munis – a trait rarely found in many index-based municipal bond funds.
“The fund will normally invest a minimum of 50% of its net assets in municipal securities that are rated investment grade or unrated securities we believe to be of comparable quality. A maximum of 50% of total net assets can be invested in below investment grade securities, commonly referred to as high yield or junk bond,” according to First Trust.
With FMNY, investors are obviously making a state-specific bet, but with the economy rebounding, that risk may be diminishing. Just one state – Illinois – bored money from the Treasury under the coronavirus relief plan, and other large states are collecting more tax revenue than expected, a scenario that should continue as unemployment declines.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
