Municipal bonds and the related ETFs are often viewed as a conservative asset class, but there are ways for spicing up the muni bond trade and some ETFs can help with that objective. Consider the newly minted First Trust Municipal High Income ETF (NASDAQ: FMHI), which launched last week.
Munis also help diversify fixed-income portfolios. Investors who typically follow the Barclays U.S. Aggregate Bond Index will not have municipal bond exposure, so a muni bond ETF can complement core fixed-income positions.
Municipal bonds continue to experienced robust demand from U.S. investors as reliable source of yield, especially among taxable accounts due to the debt securities’ favorable tax-exempt status. Recently, Japanese investors have gobbled up U.S. munis as a way of generating income as Japan maintains negative interest rates.
FMHI’s “primary investment objective will be to seek to provide federally tax-exempt income, and its secondary objective will be long term capital appreciation. Under normal market conditions, the Fund seeks to achieve its investment objectives by investing at least 80% of its net assets (including investment borrowings) in municipal debt securities that pay interest that is exempt from regular federal income taxes,” according to First Trust.
FMHI is actively managed and the fourth municipal bond fund in the First Trust lineup.
“The fund is managed by First Trust using a disciplined approach that focuses on a combination of quantitative analysis and fundamental research,” according to First Trust. “In seeking attractive income, the fund will focus on non-rated bonds, lower investment-grade bonds and below investment-grade or “high yield” municipal bonds, while offering daily liquidity and full transparency of holdings.”
Related: Active Muni ETFs Could Help Investors Better Access Income Opportunities
The bulk of FMHI’s portfolio currently focuses on bonds with maturities ranging from five to 18 years in an effort to minimize interest rate risk. FMHI charges 0.55% per year, or $55 on a $10,000 position.
“Some municipalities have faced increasing economic challenges, which we believe has raised the importance of active credit analysis and municipal bond expertise,” said First Trust. “Unlike index-based ETFs that may simply rely on rating agencies for credit analysis, we believe it is critical to understand an issuer’s ability to meet its financial obligations. Active portfolio management allows the fund managers to make portfolio adjustments as conditions change.”
For more information on the munis market, visit our municipal bonds category.