By Michael Cohick, Director of Product Management
Municipal bonds typically dip in September and October but rebound in November and December, presenting a potential low-cost entry for tax-efficient investing as the year concludes.
Municipal bonds have historically seen negative performance in September and October, only to historically rebound in November and December. Muni bonds’ Fall pullback could offer investors an attractive entry point as we finish the last two months of the fourth quarter.
Investors looking to go on a muni bond holiday buying spree may want to consider the VanEck Short Muni ETF (SMB), which offers one of the lowest fees (0.07% expense ratio) in the short-term municipal bond peer group. In addition, SMB could be a good strategy for tax loss harvesting season, as investors can consider locking in their losses while they ride out 2023 with attractive tax-exempt income.
SMB Costs 70% less than the Average Expense Ratio of ETFs in the Muni National Short Morningstar Category
Source: Morningstar Direct. As of 10/31/2023.
What is Tax Loss Harvesting?
Tax loss harvesting is a strategy investors use to minimize their annual tax liability. The basic idea is to sell investments that have lost value to offset capital gains from other investments. Let’s say you own an ETF that has decreased in value by $2,000 since you purchased it. You can sell the ETF and use the $2,000 loss to offset any capital gains you may have realized during the year.
Selling an asset disrupts the balance of a portfolio. After tax-loss harvesting, investors with carefully constructed portfolios can replace the asset sold with a similar alternative to maintain the portfolio’s asset allocation and expected risk and return profile. Investors should avoid buying the same asset they just sold at a loss, which may help them avoid the IRS wash-sale rule. Alternatively, SMB, with its low expense ratio and high correlation to other short-duration or short-maturity-focused ETFs, makes it an ideal option for investors considering implementing such a tax strategy.
High Correlation Among Short-Maturity Focused ETFs Makes for Ideal Tax Lost Harvest Opportunity
|SMB||VanEck Short Muni ETF||1.00|
|SUB||iShares Short-Term National Muni Bd ETF||0.95||1.00|
|DFNM||Dimensional National Municipal Bond ETF||0.94||0.98||1.00|
|JMST||JPMorgan Ultra-Short Municipal Inc ETF||0.86||0.90||0.91||1.00|
|SHM||SPDR® Nuveen Blmbg ST MunBd ETF||0.96||0.98||0.98||0.91||1.00|
|MEAR||iShares Short Maturity Municipal Bd ETF||0.85||0.86||0.91||0.92||0.89||1.00|
|TAFI||AB Tax-Aware Short Duration ETF||0.96||0.98||0.98||0.93||0.92||0.82||1.00|
|SMMU||PIMCO Short Term Municipal Bond Actv ETF||0.95||0.97||0.99||0.88||0.96||0.88||0.98||1.00|
|FUMB||First Trust Ultra Short Dur Muncpl ETF||0.88||0.92||0.92||0.88||0.90||0.86||0.95||0.89||1.00|
|FSMB||First Trust Short Dur Mgd Muncpl ETF||0.93||0.96||0.99||0.86||0.96||0.85||0.98||0.98||0.89||1.00|
Source: Morningstar Direct. As of 10/31/2023. Correlation is based on 3-year returns.
|Quarter End Returns (%) as of 9/30/2023|
|Ticker||Investment Objective||Fund Type (Active/Passive)||1 Yr||3 Yr||5 Yr||10 Yr||Since Inception||Inception Date||Expense Ratio|
|SMB||VanEck Short Muni ETF||Seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the ICE Short AMT-Free Broad National Municipal Index (MBNS).||Passive||NAV||2.05||-1.19||0.84||0.87||1.68||02/22/2008||Gross||0.07|
|SUB||iShares Short-Term National Muni Bd ETF||Seeks to track the investment results of an index composed of investment-grade U.S. municipal bonds with remaining maturities between one month and five years.||Passive||NAV||1.98||-0.52||0.89||0.75||1.26||11/05/2008||Gross||0.07|
|DFNM||Dimensional National Municipal Bond ETF||Seeks to provide current income that is expected to be exempt from federal personal income tax.||Active||NAV||1.68||—||—||—||-2.54||11/15/2021||Gross||0.19|
|JMST||JPMorgan Ultra-Short Municipal Inc ETF||Seeks to deliver current income exempt from federal income taxes while managing risk.||Active||NAV||2.88||0.84||—||—||1.45||10/16/2018||Gross||0.18|
|SHM||SPDR® Nuveen Blmbg ST MunBd ETF||Seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the Bloomberg Managed Money Municipal Short Term Index.||Passive||NAV||1.41||-1.58||0.47||0.60||1.51||10/10/2007||Gross||0.20|
|MEAR||iShares Short Maturity Municipal Bd ETF||Seeks to maximize tax-free current income.||Active||NAV||3.12||0.88||1.24||—||1.07||03/03/2015||Gross||0.25|
|TAFI||AB Tax-Aware Short Duration ETF||Seeks to provide relative stability of principal and a moderate rate of after-tax return and income.||Active||NAV||3.01||—||—||—||1.22||09/13/2022||Gross||0.27|
|SMMU||PIMCO Short Term Municipal Bond Actv ETF||Seeks attractive tax-exempt income, consistent with preservation of capital.||Active||NAV||2.89||-0.10||1.21||1.03||1.05||02/01/2010||Gross||0.35|
|FUMB||First Trust Ultra Short Dur Muncpl ETF||Seeks to provide federally tax-exempt income consistent with capital preservation.||Active||NAV||2.57||0.71||—||—||1.14||11/01/2018||Gross||0.45|
|FSMB||First Trust Short Dur Mgd Muncpl ETF||Seeks to provide federally tax-exempt income consistent with capital preservation.||Active||NAV||1.89||-0.41||—||—||1.17||11/01/2018||Gross||0.55|
Source: Morningstar as of 9/30/2023.
The performance data quoted represents past performance. Past performance is not a guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Performance may be lower or higher than performance data quoted. Please call 800.826.2333 or visit vaneck.com for performance current to the most recent month ended.
Van Eck Associates Corporation (the “Adviser”) will pay all expenses of SMB, except for the fee payment under the investment management agreement, acquired fund fees and expenses, interest expense, offering costs, trading expenses, taxes and extraordinary expenses. Notwithstanding the foregoing, the Adviser has agreed to pay the offering costs until at least September 1, 2024. “Other Expenses” have been restated to reflect current fees.
The VanEck Short Muni ETF (SMB) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the ICE Short AMT-Free Broad National Municipal Index (MBNS), which is intended to track the overall performance of the U.S. dollar-denominated short-term tax-exempt bond market.
- Income exempt from federal taxes.
- Focus on short-duration municipal bonds.
- Investment-grade exposure with high credit quality.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
Index performance is not representative of fund performance. Indices are not securities in which investments can be made. It is not possible to invest directly in an index.
The Fund’s performance, because it is a fund of funds, is dependent on the performance of the Underlying Funds. The Fund is subject to the risks of the Underlying Funds’ investments, and the Fund’s shareholders will indirectly bear the expenses of the Underlying Funds. In addition, at times certain segments of the market represented by the Underlying Funds may be out of favor and underperform other segments. The shares of a closed-end fund may trade at a discount or premium to its net asset value (“NAV”). Additionally, the securities of closed-end investment companies in which the Fund will invest may be leveraged. As a result, the Fund may be indirectly exposed to leverage through an investment in such securities. An investment in securities of closed-end investment companies that use leverage may expose the Fund to higher volatility in the market value of such securities and the possibility that the Fund’s long-term returns on such securities (and, indirectly, the long-term returns of the Shares) will be diminished.
ICE Data Indices, LLC and its affiliates (“ICE Data”) indices and related information, the name “ICE Data”, and related trademarks, are intellectual property licensed from ICE Data, and may not be copied, used, or distributed without ICE Data’s prior written approval. The licensee’s products have not been passed on as to their legality or suitability, and are not regulated, issued, endorsed, sold, guaranteed, or promoted by ICE Data. ICE Data MAKES NO WARRANTIES AND BEARS NO LIABILITY WITH RESPECT TO THE INDICES, ANY RELATED INFORMATION, ITS TRADEMARKS, OR THE PRODUCT(S) (INCLUDING WITHOUT LIMITATION, THEIR QUALITY, ACCURACY, SUITABILITY AND/OR COMPLETENESS).
An investment in the Fund may be subject to risks which include, among others, municipal securities, credit, interest rate, California, New York, call, market, operational, sampling, index tracking, tax, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, and industry concentration risks, all of which may adversely affect the Fund. Municipal bonds may be less liquid than taxable bonds. There is no guarantee that the Fund’s income will be exempt from federal, state or local income taxes, and changes in those tax rates or in alternative minimum tax rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. Capital gains, if any, are subject to capital gains tax. The Fund’s assets may be concentrated in a particular sector and may be subject to more risk than investments in a diverse group of sectors.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of the Funds carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.
Originally published 9 November 2023.
For more news, information, and analysis, visit the Beyond Basic Beta Channel.