Last year was a tough year for municipal bonds — a “bloodbath” according to at least one municipal bond manager. But there is a case for investors to revisit the government-backed debt securities this year — municipal bonds tend to rebound well in years after significant outflows, and the environment for them this year has some notable factors in their favor. For investors looking at a possible 2023 muni rebound, it may be worth following an active muni ETF like the Franklin Dynamic Municipal Bond ETF (FLMI).
Municipal bonds have benefitted from high demand and low supply so far this year. With 21% of outstanding tax-exempt debt set to mature by the end of 2024, there will be significant redeemed money looking for new municipal bond homes soon — driving prices even higher thanks to limited supply. Should municipalities limit the release of new muni debt, that should also keep supply depressed and prices higher moving forward.
ETFs in the muni national long category on YCharts have returned 1.5%, while the New York long muni category has returned 1.6% That’s better than returns for taxable categories like corporate bonds which have returned just 0.9% over that same time, or long-term bonds which have returned 0.8% overo ne month, as well. Government bonds started the year with their biggest weekly inflow in a year and a half, as well, adding to their momentum.
FLMI could be an attractive active muni ETF to express a view on the muni market right now. The strategy is actively managed and charges 30 basis points as it aims to maintain a maturity of three to ten years.
The active muni ETF has outperformed its ETF Database Category Average and its Factset Segment Average over the last three months, with its 5.1% return outdoing the two averages by 1% and 1.5% respectively in that time. The strategy has also added $5.9 million in net inflows over the last month.
As bonds reemerge from a difficult regime of low, low interest rates and return to investors’ portfolios in force, finding the right option has become an important question. Municipal bonds may be one notable area to consider, with FLMI an ETF to follow in the weeks ahead.
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