As more investors are heading back to bonds, an ideal choice to get an added dose of yield as well as credit quality is municipal bonds. More specifically, exchange traded funds (ETFs) that offer muni exposure can provide efficient access.
There’s a lot of talk swirling in the capital markets about a potential recession. As the U.S. Federal Reserve continues to tighten monetary policy, they could do so at the detriment of the economy and spin it into a recession — some economic experts think we are already in one.
If that’s the case, municipal bonds are fiscally sound enough to withstand a recession. As opposed to other types of debt, municipal bonds ideally offer credit quality of higher caliber than, say, corporate bonds.
As Katherine Lynch of Morningstar noted, “thanks to a general trend of many state and local governments strengthening their fiscal positions over the past several years, credit quality in the muni market is seen to be exceptionally strong. That should help muni-bond funds ride out the kind of recession that could hurt corporate bonds or other credit sensitive parts of the fixed-income market.”
Of course, when it comes to fixed income, investors are also searching for yield. In the case of municipal bonds, there’s also the added benefit of tax-free income, which is always a plus.
“That’s especially the case when factoring in the primary benefit that comes from tax-exempt muni-bond funds: They’re free from federal income taxes,” Lynch added. “Investors can also avoid paying state taxes on the income they receive if they purchase municipal bonds in the state they live in, making them even more attractive than taxable bonds.”
Efficient Muni Access in 1 ETF
Given the vast array of municipal bonds available on the market, ETFs can offer easy access. Active ETFs, in particular, put the selection process in the hands of seasoned portfolio managers.
As such, one fund to consider is the ALPS Intermediate Municipal Bond ETF (MNBD). As mentioned, MNBD is actively managed and offers exposure to investment-grade, intermediate-term municipal bonds that are exempt from federal income tax.
While the default option in today’s rising rate environment is to opt for short-term bonds, intermediate bonds can offer higher yield if investors are willing to accept more duration risk. The fund’s investments may be fixed-, variable-, or floating-rate municipal securities that could include general obligation bonds and auction-rate municipal securities, according to VettaFi.
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