ETF Trends CEO Tom Lydon discussed the IQ MacKay Shields Municipal Intermediate (MMIT) on this week’s “ETF of the Week” podcast with Chuck Jaffe on the MoneyLife Show.
MMIT seeks current income exempt from federal income tax. The Fund seeks to achieve its objective by investing primarily in investment-grade municipal bonds and will also seek to enhance total return potential through its subadvisor’s active management approach.
Fixed-income investors may consider an active approach to better navigate the municipal bond market. The municipal bond market might be the final frontier for alpha generation within the fixed-income space. Inefficiencies within the category set the stage for adept managers to weave in and out of the market.
So, what’s going on in munis now? Lower-for-long rate environment is pushing more fixed-income investors to look for yield generating opportunities. Munis are strengthening with yields sliding sharply across maturities after lawmakers reached an agreement on a massive spending package and tax breaks to alleviate the economic fallout from the coronavirus or COVID-19 outbreak that has shut down industries across America and kept many people at home. The stimulus package includes about $500 billion that can be used to back loans and assistance to companies, as well as state and local governments.
Listen to Tom Lydon Discuss MMIT ETF With Chuck Jaffe:
The municipal bond market is too big for fixed-income investors to ignore. It is comprised of $3.81 trillion in outstanding debt with more than nine times the issuers and 50 times the CUSIPS of the U.S. corporate bond market. However, the majority of investors are retail passive based. 70% of outstanding debt is held by retail investors who invest generally based on the tax-exempt yield and maturity. They show less emphasis based on credit fundamentals.
Credit analysis is still paramount as underfunded pensions, demographic shifts, and tax reform policies continue to hang over the market. A sharp reduction in bond insurance further exposes the market to underlying credit risks. Meanwhile, the global financial regulations have driven the dealer’s balance-sheet commitment to munis down by two-thirds, diminishing liquidity. Broker-dealer inventories have declined significantly, from $50 billion in 2007 to $16 billion in December 2019. The market has become less liquid and more volatile, which increases the potential benefits of active management that can spot opportunities.
There is active management in the munis market that can better spot changing opportunities. They can exploit market inefficiencies with better information. With headlines and low new issue penetration by monoline insurance companies, the value of full-time credit research by career municipal professionals has never been more important
Trading costs for larger institutions are lower than for individuals after the post-2008 regulatory environment. For those not receiving institutional pricing, escalating trading costs have also become more transparent.
Recent tax reform added to challenges for buying individual bonds. Financial Analysts have a challenge buying individual bonds – the post-2008 regulatory environment coupled with the recent passage of tax reform.
Prudent credit selection combined with relative value analysis will contribute to outperforming the benchmark and passive strategies. Additionally, banks and broker-dealers have committed less capital to munis, diminishing inventory for financial advisors.
As mentioned, MMIT seeks current income exempt from federal income tax. The fund invests primarily in investment-grade municipal bonds and will also try to enhance total return potential through MacKay’s active management approach. The team relies on credit analysis, yield curve positioning, and sector rotation to uncover the most compelling opportunities.
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