Municipal bonds aren’t setting the fixed income market on fire to start 2023, but they aren’t slumping, either, indicating that income investors looking to eschew risk may be able to return to this once-beloved asset class.
Exchange traded funds rank among advisors’ and investors’ preferred avenues for accessing broad swaths of municipal debt, and the Vanguard Tax-Exempt Bond ETF (VTEB) merits a place in that conversation. VTEB, which follows the Standard & Poor’s National AMT-Free Municipal Bond Index, is modestly higher to start 2023.
Of course, dramatic upside isn’t the primary reason that investors engage with muni bonds and ETFs such as VTEB. Reliable, less-risky income is, however, a selling point. Decent income and reduced risk must be supported by strong fundamentals, which are present in the municipal bond space today.
“Strong economic and job growth bolstered muni credit in 2022. We expect munis to continue to show strength into 2023, however revenue velocity is expected to moderate along with the economy. In the high yield space, we do see sector specific pressures continuing into 2023, which can also provide investment opportunities,” noted David Alter, head of AM municipal research at Goldman Sachs Asset Management (GSAM).
In terms of muni fundamentals, it’s essential that investors evaluate fiscal positions among the major issuing states, including the likes of California, New York, and New Jersey, among others. Those states’ economies aren’t perfect — no economy is — but they are proving adept at tax collection, signaling that debt obligations aren’t in danger of not being tended to.
Additionally, VTEB is home to 6,936 bonds — a sizable roster in this ETF category that indicates geographic risk isn’t particularly high with this fund. From a credit quality perspective, VTEB offers risk-averse investors a lot to like because more than 95% of its holdings are rated AAA, AA, or A. That makes it easier to hold VTEB in what could be an environment of muted muni returns this year.
“We believe 2023 will be a year to maintain a neutral position and let the elevated yields purchased in 2022 work for investors in the form of carry. Investors may experience mid-single digit returns in 2023 as we begin the year with tax-free AAA muni yields between 2.50% and 3.50% and see the potential for a stable or potentially lower interest rate environment ahead,” concluded GSAM.
VTEB yields 2.15% and sports an annual expense ratio of just 0.05%, or $5 on a $10,000 position.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.