High-Quality Munis Could Be High-Quality Idea in 2023 | ETF Trends

The Bloomberg US Aggregate Bond Index is coming off its worst annual performance since inception in 1976, and municipal bonds of various credit qualities were caught up in that mess. Blame the Federal Reserve’s seven interest rate hikes.

Still, the widely observed ICE AMT-Free US National Municipal Index was significantly less worse than the “Agg” last year, indicating that municipal bonds could deliver for risk-averse income investors this year. That could be good news for the related exchange traded funds, including the VanEck Intermediate Muni ETF (ITM).

ITM, which follows the ICE Intermediate AMT-Free Broad National Municipal Index, also outperformed the Agg last year. With a lineup that’s more than 90% investment-grade, the VanEck ETF could be poised for even better things in 2022.

“Tax-exempt yields are near the highs of the past decade. They offer attractive levels of income with defensive credit characteristics if the economy slows more than expected in 2023,” says David Hammer, the head of municipal bond portfolio management at Pimco,” reported Andrew Bary for Barron’s.

For its part, the $1.9 billion ITM sports a 30-day SEC yield of 2.92%, which is impressive when considering that roughly 84% of the ETF’s 1,804 holdings carry ratings of AAA, AA, or A. In other words, ITM provides investors with a decent level of income with nearly no credit risk.

“High-quality munis have experienced very low historical default rates because issuers provide essential services such as water or highways, or have the taxing power of state and local governments,” according to Barron’s.

When it comes to municipal bonds, defaults are usually the symptom of poor revenue collections or expenses outpacing revenue in a particular jurisdiction. Fortunately for ITM investors, the ETF allocates more than 35% of its weight to munis issued by New York and California — two states with substantial tax bases. Texas is one of the fastest-growing states in the country, meaning its tax bases are increasing, and that’s relevant here because ITM allocates 8.73% of its weight to that state.

Additionally, ITM may be offering value because as Nisha Patel, a managing director in the municipal bond group at Parametric, a division of Morgan Stanley, told Barron’s, real yields are at compelling levels, which could lead to a bond rebound in 2023.

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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.