With more and more investors allocating to muni bonds, many may be asking: what’s the best approach? The category’s benefits are as numerous as its idiosyncrasies, which calls for a nuanced, flexible strategy. Active ETFs can help, bringing to bear managerial experience in a nuanced category with ETFs’ tax friendliness and efficiency that has helped muni bond ETFs hit $144 billion in AUM as of May 31 this year.
Fixed Income and Active Management
Active management and fixed income are a “natural fit,” according to analysis from Goldman Sachs. Given how important understanding issuers’ credit ratings and outlooks is, that makes sense. What’s more, active can also help maintain a certain allocation; passive, indexed bond solutions often struggle with early calls for debt securities.
The piece, written by Goldman Sachs co-head of municipal fixed income Sylvia Yeh and Fixed Income Client Portfolio Manager, Fixed Income and Liquidity Solutions Matt Wrzesniewsky, also pointed to active ETFs’ ability to provide higher yields from muni bonds.
“For example, active managers can consider various strategies to manage duration but also the dynamics of the yield curve which include—a bullet maturity distribution, a barbell maturity structure, or a laddered approach,” they wrote. “Depending on the environment, each has different risk reward profiles.”
“In addition to the inherent tax advantages, high yield municipal bonds can also enhance portfolio diversification given idiosyncratic risk profiles and lower correlation with equities,” they added. “High-yield munis have also exhibited lower historical default rates than their high yield corporate counterparts—a powerful differentiator for the asset class.”
Looking ahead, active muni bond ETFs could prove a powerful tool. Especially as uncertainty builds, adding income via muni bonds could benefit investors of all ages and financial profiles. Active management can leverage the experience of teams like those at Goldman Sachs like Yeh and Wrzesniewsky to outperform and find the best opportunities in a complicated 2025.
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