Count municipal bonds among the fixed income assets that are rebounding in the early stages of 2023. Fortunately for advisors and investors, municipal bonds’ gains to start this year are modest and yields remain elevated, indicating there’s plenty of potential upside ahead for this asset class.
That could put a spotlight on the related exchange traded funds, including the Avantis Core Municipal Fixed Income ETF (AVMU). AVMU holds 631 municipal bonds and follows the S&P National AMT-Free Municipal Bond index.
AVMU turned two years old last December, and while that’s relatively young compared to some other products in the muni bond ETF arena, this corner of the ETF market could be poised for rapid growth in the years ahead, potentially boosting AVMU in the process.
“One possible reason for the rising popularity of fixed income ETFs could be investor preference for index-based products with increased transparency and liquidity. Another reason could be the ease of access and low cost. Evidence that retail transaction costs to trade municipal bonds can be as much as 66 bps more than institutional trades provides a good reason for this one-sided flow,” according to S&P Dow Jones Indices.
When it comes to costs, many traditional pure beta ETFs are free to trade at a number of large brokerage firms, and AVMU sports an annual fee of just 0.15%, or $15 on a $10,000 investment. That’s among the more favorable expense ratios in the category.
AVMU has another point in its favor. The tax-equivalent yield on the S&P National AMT-Free Municipal Bond Index is 4.63%, or just 37 basis points below what’s found on a comparable index of corporate bonds, which carries more credit risk. Over 87% of AVMU’s holdings are rated AA or A, and nearly 10.3% carry AAA ratings, indicating that credit risk is tame with this ETF.
“Taking tax benefits into account puts municipal bonds on equal footing with other taxable fixed income sectors like treasuries and corporate bonds. U.S. Treasury yields fall short of that, at 4%, while corporate bonds currently exceed 5%,” added S&P Dow Jones.
Possible rebounds for the 60/40 portfolio and a sizable amount of Baby Boomers entering retirement in the coming years are also among the catalysts that could spark growth for AVMU.
“As a larger percentage of the population enters retirement age, the need for a fixed stream of income would appear to be greater,” concluded S&P.
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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.
