It appears probable that the U.S. economy will avert a recession. Additionally, it’s increasingly likely the Federal Reserve will soon lower interest rates to juice economic activity. So there’s optimism economic contraction will be avoided.
Hopefully, that proves accurate. Still, it always pays to be prepared. Investors can find that preparation and some added income in the form of municipal bonds. Market participants that want to some protection to their portfolios can consider exchange traded funds such as the ALPS Intermediate Municipal Bond ETF (MNBD).
As an actively managed ETF, MNBD could prove useful to income investors in the event of a recession. Some states and cities will react differently to economic contraction. Likewise, an economic downturn could put an emphasis on high credit quality or certain types of muni debt. An actively managed ETF like MNBD can nimbly respond to situations like these.
MNBD Could Be Sturdy in Recession
The impressive credit quality seen throughout the municipal bond space underscores the case for MNBD. Currently, 71.4% of these bonds sport AAA rating – the highest percentage in 15 years.
That’s the result of increasing revenue collection and some states bolstering emergency reserves in the wake of the coronavirus pandemic. These two factors that augur well for ETFs like MNBD.
“Over the past few years, most states have built up their rainy day funds. Rainy-day funds reached a record high in 38 states at the end of fiscal year 2023, according to The Pew Charitable Trusts,” noted Cooper Howard of Charles Schwab. “In fact, Pew estimates that the average state could operate for roughly a month and a half on savings alone. Pew also estimates that 19 states reached a record of the number of days they could operate on savings alone largely due to tightening spending.”
Howard made another interesting observation. On a historical basis, state and municipal revenue doesn’t suffer immediately following the start of a recession. There’s a lag and that implies a fund such as MNBD could be somewhat resilient following the start of a recession.
On a related note, muni ratings rarely suffer soon after a recession indicating that ETFs such as MNBD are unlikely to see a raft of holdings-level downgrades if the economy swoons. Plus, munis often deliver solid returns soon after a recession starts.
“A recession, by definition, is a sustained period of economic decline, which historically has translated to yields for longer-term bonds falling. In four of the past five recessions, municipal bonds have posted positive total returns over the 12 months following the start of the recession. Only in the 2007-2009 recession did munis post a negative return in the 12 months after the start of the recession,” concluded Howard.
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