Bond yields move inverse of prices, which is to say yields on a variety of fixed income exchange traded funds are high today because of slumping prices caused by six interest rate hikes by the Federal Reserve. The carnage is widespread across the fixed income landscape, and municipal bonds haven’t been spared the wrath of Fed tightening.
However, some market observers believe the asset class is currently offering value, particularly with yields as high as they’ve been in a decade. That could open to the door to opportunity with ETFs such as the SPDR Nuveen Municipal Bond ESG ETF (MBNE).
MBNE, which debuted in April, sports a 30-day SEC yield of 3.30%. That’s lower than some broad-based municipal bond benchmarks, which is more a testament to the quality attained when pairing munis and environmental, social, and governance (ESG) principles than it is an indictment of the fund.
“The yield on the Bloomberg U.S. Aggregate Bond Index stood at about 5.0% as of the end of October. Yields for the Bloomberg Municipal Bond Index edged up to 4.1%, while the high-yield municipal benchmark yielded 6.3%,” noted Morningstar analyst Amy Arnott.
MBNE’s option-adjusted duration is 5.04 years, making it an intermediate-term fund. That, coupled with its decent yield, makes the SPDR ETF appealing to a broader audience than is typically found embracing municipal bond funds.
“While municipal bonds usually don’t make sense for investors in lower tax brackets, muni yields are currently high enough to make them worth considering even for investors with more moderate income levels. For investors who are married filing and jointly in tax-year 2022, for example, the 24% tax bracket spans a range of taxable income from $178,151 to $340,100. Investors in that bracket can currently earn a taxable equivalent yield of 4.28% for a typical intermediate-term muni fund, which compares favorably with the average yield of 3.55% for intermediate-term core bond funds,” added Arnott.
Roughly 76% of MBNE’s holdings carry AAA, AA, or A ratings, confirming that the actively managed fund features minimal credit risk. On a related note — one that could make the ETF all the more appealing — is the point that broad municipal bond market fundamentals are strong.
“With unemployment still running at historically low rates, state and local governments have also been collecting more revenue from income taxes and property taxes. Many municipalities have used this extra cash to build up their reserves, which should help cushion the blow if a weaker economy leads to lower tax revenue,” concluded Arnott.
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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.