Rising interest rates are plaguing various corners of the fixed income market and municipal bonds aren’t immune from that ominous trend.
However, there might be a silver lining for muni investors and that’s important because munis are among the most widely held bonds by retail investors – either in individual issue or fund form – owing to the tax advantages and steady income offered by the asset class. That silver lining is that following declines to start 2022, municipal bonds are now attractively valued.
That could be a catalyst for exchange traded funds, including the Avantis Core Municipal Fixed Income ETF (AVMU). The actively managed fund looks to top the results offered by the S&P National AMT-Free Municipal Bond Index. With some experts recommending cautious approaches to risk assets over the near term, AVMU could be a solid idea for risk-averse market participants.
“Truist Advisory Services this past week downgraded its recommended stock exposure to neutral, its lowest level since 2010, owing to the drop in the equity risk premium (the extra return from stocks over bonds). The move reflected a downshift in global economic growth, stickier inflation trends, and ongoing geopolitical risks, as well as Federal Reserve policy tightening, which may mean that growth could suffer if inflation isn’t tamed, a research note said,” reports Randall Forsyth for Barron’s.
AVMU holds 453 bonds, 22.28% of which are special tax issues. Another 29% are either state or local general obligation bonds. AVMU’s interest rate sensitivity isn’t high as its duration in five years, indicating investors not familiar with this fund may be missing out as they depart other muni products.
“The muni market is going through one of its typical bouts of feast and now famine,” he writes in a client note. Tax-free bond funds saw $4.8 billion exit in the week ended on April 6, the most since the financial market meltdown in March 2020, according to Investment Company Institute data reported by the Bond Buyer. “Muni fund managers sell what they can to meet redemptions, overwhelming Wall Street dealers with supply,” says John R. Mousseau, CEO and director of fixed income at Cumberland Advisors, according to Barron’s.
AVMU is also ideal for investors looking to skirt credit risk as the fund allocates more than 96% of its weight to bonds rated AAA, AA, or A.
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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.