The widely followed ICE AMT-Free US National Municipal Index posted a solid performance in 2023. This stokes hope that even better things could be in store for municipal bonds and the related ETFs in 2024.
Amid hopes that the Federal Reserve could lower interest rates multiple times next year, the bullish thesis for municipal debt could be validated, indicating there’s potential opportunity afoot with ETFs such as the Eaton Vance Intermediate Municipal Income ETF (NYSE Arca: EVIM).
The actively managed EVIM debuted in October. It attempted to beat the ICE Bank of America 2-17 Year US Municipal Securities Index. EVIM’s status as an actively managed ETF could prove beneficial to fixed income investors in 2024. Reasons include but are not limited to the possibility that bond market volatility could rise and the specter of declining tax revenue in some states.
EVIM Merits Attention
While EVIM is fresh on the muni bond ETF scene, the rookie fund could prove pertinent and useful to income investors seeking tax-advantaged strategies in 2024. For example, EVIM’s 3.65% 30-day SEC yield is attractive. Plus, its duration of 4.99 years could prove advantageous if rate cuts materialize. That would compel bond investors to move away from short-term fare.
“Additionally, longer-term municipal bonds offer greater relative value compared to shorter-term munis in our view. The gap between AAA-rated municipal bonds and Treasury bonds after taxes is fairly tight up until about ten years and then begins to widen out,” according to Charles Schwab research. “We don’t advocate investing in very long-term bonds, but the implication is that for investors looking to round out their muni holdings and add duration. Longer-term munis offer greater value than short-term munis in our view.”
As for credit risk, that’s hardly a concern with EVIM. More than 82% of the fund’s holdings rate as AAA, AA, or A. The ETF’s credit quality breakdown is important because some of the tailwinds that supported municipalities, including the federal coronavirus stimulus, are subsiding.
Another issue for investors to monitor in 2024 vis a vis EVIM is the possibility that bond yields will decline. When muni bond yields fall, it usually increases flows to the related ETFs and mutual funds.
“Fund flows are loosely correlated with total returns for municipal bonds. In other words, shortly after yields decline and prices move higher (because yields and prices move in opposite directions), demand begins to pick up in the form of positive fund flows. Favorable demand without a parallel uptick in supply should further support total returns in 2024,” concludes Schwab.
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