ETF Trends CEO Tom Lydon discussed the JPMorgan Municipal ETF (JMUB) on this week’s “ETF of the Week” podcast with Chuck Jaffe on the MoneyLife Show.
When questioned why it’s time to look into municipal bonds, Lydon explains that rates and yields are down, and while municipal bonds are generally paying less than they did 12 months ago, taxes are something to be concerned about. This is especially the case for those making decent money.
As a result, many people with money are looking to diversify into municipal bonds, but not all municipal bond ETFs are created equal. There are some advantages to be found in actively managed ETFs, as opposed to indexed ETFs.
For example, on the taxable side, the Barclays Aggregate Index has trillions of dollars following it worldwide, despite how much the Index has changed over time. The duration is long, the credit quality is less. To some degree, that’s the same with long-term, widely known municipal bond indexes.
Meanwhile, J.P. Morgan Asset Management has come in and made a plan to actively manage in areas where they see opportunities.
“The widely known indexes tend to have a lot of state holdings within the index, as opposed to local municipalities,” Lydon explains.
A problem with investing locally in municipal bonds is not always having information about those municipalities or local areas versus state areas. This creates a lot more work for those tracking it.
“So, it’s a lot easier just to buy state paper, as opposed to local paper. J.P. Morgan feels it’s worth the work and the effort to dive in and look locally,” Lydon adds.
Investing With Less Risk
With the economy being in a good place, a lot of local municipalities have done a great job running their P&L, not running significant deficits, and paying out decent yields. So now, the question is whether one can invest in municipal bonds to get a more competitive yield with less risk. J.P. Morgan feels that’s possible.
As Lydon reiterates, “There are some choices out there, and if you’re concerned about your taxes, and you want to have more of a tax-free income by choosing municipal bonds, not all municipal bond ETFs are created equal.”
With Jaffe referring to the bond as a passively active one, as well as a diversification play, Lydon agrees. He states how when investors are looking for income for an extended period of time and taxes are a big factor, having long-term holdings in municipal bonds are really important.
“If you’re buying and selling, yeah, you’re generating that income, but you’re generating capital gains if your selling over certain periods of time.”
JMUB has had a pretty good run to the upside. Further cuts would also help the fixed income markets from an appreciation standpoint. The current environment is not just about the yield; it’s the potential appreciation as well. As more see opportunities not only at the state but at the local level and going into areas such as colleges and other areas that issue their own bonds, there is a lot of great opportunities out there thanks to a strong economy.
Related: ETF of the Week: Columbia Diversified Fixed Income Allocation ETF (DIAL)
There is a lot to choose from, but there are also periods when defaults occur. As recessionary times come closer, more and more of those underrated bonds may fall into that category. An active manager is vital in this regard, as the effort put in there will only help the investor if proper work is being done.
“You can trade a stock, you can trade an ETF, you can trade a muni ETF for sure in following trends,” Lydon said. “There may be periods of time when we see rising rates again, and no matter what, on the fixed income side, you’re gonna have some depreciation, as there will be future rates that are going to offer better yields than what you’re currently getting now.”
As Lydon concludes, being in a lower-rate environment for likely an extended period means it’s a good time to make some appreciation for sure. But the lower yields are an issue as well.
Listen To Tom Lydon Discuss Municipal Bonds and the JMUB Fund:
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