Income investors should consider a Muni ETF strategy


As we delve into what people miss – and what risks they might accidentally take – in traditional approaches, investors may consider an active municipal bond exchange-traded fund strategy that examines the full range of market opportunities in the market. instead of being linked to the methodology of a benchmark.

In the recent webcast, The hidden income your Munis lack: an expert’s point of view, Joseph Gotelli, vice president and portfolio manager at American Century Investments, helped describe the current market environment. For example, Congress has envisioned up to $ 9.4 trillion in U.S. tax spending since the start of COVID-19. New issues of tax-exempt munis have steadily declined over the years. More importantly, we’re seeing increased interest in tax-exempt municipalities as a greater source of value for income-oriented investors, especially as the Biden administration is considering higher tax rates to pay. new government spending plans.

Looking at the municipal bond asset class, Gotelli also noted that munis offer diversification benefits for a traditional bond portfolio. Historically, munis have rarely defaulted, with companies rated Baa having three times as many cases of default than munis rated Baa.

Beyond the rate risk outlook, Gotelli argued that exposure to municipal bonds can help further diversify an investor’s fixed income portfolio through uncorrelated returns. The low correlation with other asset classes makes the Armed Bond category important in a well-diversified portfolio. Investment grade municipal bonds have a 10-year correlation of 0.73 with US core bonds, 0.23 with US high yield bonds, and 0.04 with US stocks.

the American Century Diversified Municipal Bond AND F (IMPT) is an actively managed municipal bond fund that combines investments in carefully considered high yield and investment grade municipal bonds. Designed for investors seeking current income, the fund dynamically adjusts investment grade and high yield exposures according to prevailing market conditions.

IMPT incorporates a top-down and bottom-up selection process to improve risk management and create a well-diversified municipal bond portfolio. For example, the ETF’s management team takes a macro perspective that incorporates an economic perspective, duration, rates and a yield curve. The municipal market outlook integrates sectors, yield curve and municipal relative value to taxable fixed income. Fundamental credit analysis includes internal credit review, economic financial strength, debt analysis, assigned internal ratings and credit committee reviews. The discussion of relative value includes examining the price of bonds, adjusting the portfolio, and analyzing the safety of the structure. The risk budgeting process incorporates position sizing, risk model review, and expected return / tracking error projections. Finally, the buy / sell order incorporates pre-trade compliance, portfolio manager trades and best execution prices.

The TAXF management team also follows a fundamental credit analysis process which includes an internal credit review; analysis of economic, financial, debt and political risks; internal rating assigned; and monitoring ongoing exposures of issuers.

Matt Lewis, Vice President and Head of AND F implementation and capital markets at American Century Investments, also explained the benefits of the AND F as an investment tool offering more efficient access to the municipal bond market.

Specifically, the onscreen liquidity or current bid / ask spread and size available to trade reflects the trading activity that has already occurred and is visible in the secondary market, where ETFs are valued, traded and settled like stocks. Unlisted liquidity or the market maker’s ability to provide liquidity for larger trades reveals that with the help of a broker, this level of liquidity is accessible. In addition, the underlying basket or creation / redemption process represents how market makers can access the liquidity of the underlying securities to meet investor demands.

“Our solutions cover a wide range of investment capabilities,” said Lewis. “These capabilities allow us to meet specific client needs and also provide the flexibility to offer unique investment solutions. Our ability to offer a variety of investment solutions has become increasingly important to the various types of clients we serve.

Financial advisors who want to learn more about munis can watch the webcast here on request.


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