As is the case with nearly every other corner of the bond market this year, municipal bonds are languishing due to the Federal Reserve’s interest rate tightening efforts.
However, muni bonds and the related exchange traded funds are performing less poorly than aggregate bond strategies. Adding active management to the mix can further support investor outcomes. On that note, the Franklin Dynamic Municipal Bond ETF (NYSEArca: FLMI) is an ETF for income investors to evaluate.
Income investors are in fact renewing their affinity for municipal debt following a rough first half for the asset class. Market participants allocated $5.4 billion to muni ETFs in the second quarter.
“Inflows are not a perfect measure of investor demand, but the overall trend seems to be toward more conservative areas like municipal bonds, according to Strategas strategist Todd Sohn,” reported Jesse Pound for CNBC.
Muni ETFs such as FLMI are favored by risk-averse investors due to steady income streams and tax benefits. Debt issued by state and local governments pays interest, but that income usually isn’t taxed at the federal level, as is the case with common stock dividends or interest from other fixed income assets.
“Municipal bonds may be unlikely to see big gains in price that can be found in assets like growth stocks, but their tax advantages versus private debt can help boost the payouts for income-hungry investors,” according to CNBC. “As yields have jumped this year, and concerns about an economic slowdown have widened spreads, high quality debt that is slightly riskier than Treasurys could be a sweet spot for investors.”
While munis aren’t designed to be a high-adrenaline asset class, the group could surprise investors going forward because history says these bonds often perform well following significant rises in yield. As an active fund, FLMI can mitigate some of that rate risk while potentially unearthing value opportunities in the municipal bond space.
Home to 438 bonds, FLMI’s average duration is 5.73 years, putting the fund in intermediate-term territory. Credit quality is solid, as a third of the ETF’s components are rated AA or A and another 20.52% are rated BBB. FLMI’s geographic profile is also attractive because Florida, California, and Texas combine for 45% of the fund’s weight. The Franklin Templeton ETF sports a 30-day SEC yield of 2.87%.
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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.