With the ongoing capital markets discussion on inverted yield curves, the threat of a recession still looms. Fixed income investors need not fret, however, if they consider the right exposure — one option being municipal bonds.
Quality is still key when it comes to getting bond exposure, even if the bond market is rallying in 2023. That said, municipal bonds offer just that with their low credit risk and tax-free yields.
“Municipal bonds are generally a high-quality asset class with a very low historical default rate,” said Nathan Will, principal and head of municipal credit research at Vanguard. “What sets them apart is the combination of strong credit fundamentals and the opportunity to earn tax-exempt income.”
Now the question is: Where exactly should investors start? One place is the American Century Diversified Municipal Bond ETF (TAXF B), which offers diversified exposure via its 450+ holdings, as of April 30. Furthermore, the fund offers an actively managed strategy that allows for portfolio tailoring by seasoned portfolio managers.
While the prospect of adding municipal bond exposure is appealing, diving into the vast universe of options can be a daunting task. That said, an active management strategy can help put the onus of research and hand-picking holdings on experienced portfolio managers.
TAXF seeks to provide consistent tax-free income by employing an active, research-driven process that draws from across the municipal bond universe and adjusts exposure depending on prevailing market conditions. As with local government bonds in the U.S., credit risk is minimized, with close to 80% of the fund ranging in debt rated at AAA to A (as of May 31).
The fund also features a low expense ratio of 29 basis points. This should appeal to cost-conscious investors who may typically view actively managed funds as too expensive to consider.
In order to extract more yield, the fund can opt for high-yielding instruments in the municipal bond market. As a result, the 30-day SEC yield stands at 3.45% with a 2.52% 12-month distribution rate (both as of May 31).
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