Not All Vanilla: Why Active Management Makes Sense in Municipal Bonds

Municipal bonds provided both tax-advantaged income and much needed diversification throughout 2020. Yet many investors are (rightfully) concerned about state budgets and the prospects for federal stimulus. There’s never been a better time to look for help from what has been a long-term, resilient asset class.

In the upcoming webcast, Not All Vanilla: Why Active Management Makes Sense in Municipal Bonds, Matt Lewis, VP, Head of ETF Implementation and Capital Markets, American Century Investments; and Joseph Gotelli, VP, Portfolio Manager, American Century Investments, will show you how adding municipal bonds to the equation may be the solution.

Specifically, fixed-income investors can look to the American Century Diversified Municipal Bond ETF (NYSEArca: TAXF).

“Many investors look to municipal bonds for their attractive taxable-equivalent yields and their relatively low default rates. Yet a market-weighted passive index approach may not fully capture these opportunities,” according to American Century.

“That’s because the market is highly fragmented. It consists of more than a million outstanding municipal securities, which makes replicating market-weighted indexes challenging. Municipal indexes also often overweight highly indebted projects or sectors. Moreover, investment grade indexes exclude un-rated issues that could offer potential for capital appreciation.”

The American Century Diversified Municipal Bond ETF is an actively managed municipal bond fund that combines investments in thoroughly researched high yield and investment grade municipal bonds. Designed for investors seeking current income, the fund dynamically adjusts investment grade and high yield exposures based on prevailing market conditions.

The muni bond ETF seeks consistent tax-free income; dynamically allocates to investment grade and up to 35% high yield to take advantage of prevailing market conditions; employs an active, time-tested process designed to identify attractive issues with low default risk; and aligns risk exposures with highest-conviction ideas.

TAXF’s sub-sector weights include special tax 15.9%; local GO 9.2%; state GO 91.%; corporate munis 8.7%; hospital 7.8%; toll facilities 6.2%; tobacco settlement 4.8%; water & sewer 4.8%; charter school 4.7%; retirement community 4.2%; student housing 4.0%; public power 3.8%; other transportation 3.6%; pre-refunded 3.3%; airport 3.1%; multi-family housing 2.3%; lease revenue 1.5%; university public 1.3%; and other utilities 0.9%.

Credit quality breakdown includes AAA 8.9%; AA 28.7%; A 19.9%; BBB 20.1%; BB 6.8%; and non-rated 14.9%.

Top state allocations include California 17%; Illinois 10%; Texas 9%; Florida 8%; and Arizona 7%.

TAXF has a 5.3 year duration and a 1.57% 30-day SEC yield.

Financial advisors who are interested in learning more about an active muni strategy can register for the Tuesday, December 8 webcast here.