Investors may be looking at tax season in the rearview, but that’s no excuse to ignore taxes all year. As discussed in previous coverage of advisors’ tax considerations, factors like the “January Effect” require tax attention. That supports the case for a tax-focused ETF like the American Century Diversified Municipal Bond ETF (TAXF) this year.
Why invest in municipal bonds right now? Fixed income overall has rebounded so far this year and municipal bonds have recovered from their brutal 2022. U.S. agency-issued bonds are offering some very intriguing yields this year, and themselves may be worth considering. Not only do they offer tax benefits, but by choosing specific vintages, they add an appealing pairing to U.S. Treasuries.
TAXF’s active investing approach includes an allocation of up to 35% in riskier munis based on market conditions. Muni bond risk focuses on credit risk and interest rate risk, but investors should also know about call risk, too. Municipal bond issuers can “call” and pay the bond before its maturity date, cutting off interest the bond holder expected.
TAXF’s 35% allocation to riskier munis has helped it perform well so far this year. TAXF has outperformed its ETF Database Category Average on a YTD basis, returning 1.8% vs. 0.85%. The tax-focused ETF charges just 29 basis points and is also approaching its five-year ETF milestone in September. TAXF has also added $70 million over the last year in net inflows.
All of this is in play just as the strategy hit a buy signal Tuesday, as well. TAXF saw its price rise above its 200-day Simple Moving Average (SMA) early Tuesday, suggesting a turn in its momentum. Technical indicators like SMAs help investors see changes over time, and with TAXF’s $49.49 price above its $49.41 200-day SMA.
Tax-free municipal bonds can be a powerful tool for advisors looking to mitigate client tax burdens all year long. With its active approach and new momentum, it may be worth considering on a mid-year ETF shortlist.
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