It’s often said that fixed income is one of the asset classes most conducive to active management. Within that space, municipal bonds stand out as a segment ripe for success with active management.
For investors looking for that combination with the benefits of the ETF wrapper, the ALPS Intermediate Municipal Bond ETF (MNBD) is an idea to consider. MNBD, which turns two years old in May, is an intermediate-term fund focusing on investment-grade debt.
It employs bottom-up fundamental analysis. With its status as intermediate-term ETF, it can potentially act as more of a portfolio diversifier than comparable short- and long-duration funds. That’s because bonds residing at those ends of the duration curve are often more correlated to equities than intermediate-term equivalents.
Active Advantages With Municipal Bond ETF MNBD
As for MNBD’s status as an actively managed ETF, that could be a noteworthy trait in the current environment. That’s because, broadly speaking, the outlook for municipal debt is solid. It remains to be seen when and to what extent the Federal Reserve reduces interest rates. But there’s no denying the U.S. economy is firm and many states are collecting taxes with ease.
Those factors highlight the perks of active management with municipal bonds, because in environments like the current one, active managers can unearth opportunities that could lead to index-beating returns.
“We believe that persistent economic strength, patience from the Federal Reserve, and weakening seasonal supply-and[1]demand dynamics could spur better valuations later in the quarter. Thus, we maintain near-term caution, but would view any material sell-off as a buying opportunity,” according to BlackRock.
Active management can also be about avoidance as much as, if not more than, what assets the style embraces. That’s something to consider with municipal bonds and ETFs such as MNBD. For example, some states have budgets that are overly dependent on personal income taxes. If corporate layoffs rise in those states, tax collections could be harmed, thus sending yields on municipal debt higher.
Likewise, as BlackRock noted, the current environment may not be the time to embrace munis tied to speculative projects, low-rated colleges and universities, and debt issued to finance long-term care facilities. Conversely, municipal debt issued by states and cities within those with low income taxes and essential services debt could be attractive over the near term. So could active management via MNBD.
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