Fall is just around the corner, and with it comes the start of portfolio preparation for the end of the year. For many investors and advisors, that means adding investments that can help reduce the tax bill from portfolios. Tax exempt bond ETFs in particular can provide a powerful tool in meeting that goal. Leaning on the ETF wrapper, those funds may be worth adding now amid continued interest rate uncertainty.
See more: Joe Gotelli Discusses Advantages of Active Municipal Bond Strategies
In that tax exempt bond ETFs category, the American Century Diversified Municipal Bond ETF (TAXF) stands out as a strong candidate. TAXF charges a 27 basis point fee for its investors. The strategy actively invests in investment grade and high-yield municipal bonds. Muni bonds are generally exempt from federal taxes and in many cases exempt from other taxes, as well.
2025 and Tax Exempt Bond ETFs
While investors don’t generally look for tax exempt bond ETFs to drive performance, TAXF has done well in longer time frames. According to ETF Database data, the strategy has outperformed its ETF Database Category and FactSet Segment averages over the last three years. The strategy returned 2% in that time, compared to 1.8% and 0.9%, respectively. Over the last month, its active managers have also helped it outperform those metrics.
In meeting its marks, then, where might it slot into portfolios? The fund won’t likely play a core role in bond allocations, but as an addition on the edges, it can reduce tax impact. The timing may be turning as well, with more than $10 million in net inflows over the last month. While the new administration passed some significant tax cuts this year, for many investors it can still be very helpful to reduce the total bill.
With its active approach, too, the fund could be poised to outperform in the months ahead. While investors may want to exhibit some caution due to the impact of federal cuts to certain bond issuers, the category remains a consistent source of portfolio support.
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