As though rising rate volatility and recession fears weren’t concerning enough for investors, the last week’s bank run drama and instability has all eyes on the risk of contagion to the broader economy. That has investors looking to safer options, and for those investors who are put off by rapidly falling yields in Treasurys, it may be the right time to consider how a muni ETF can play an important role in recession proofing portfolios in 2023.
When talking about munis, market watchers will be well aware of how badly they performed last year — what investors may not know, however, is that municipal bonds have a strong tendency to bounce back after a tough year. Not only do munis tend to rebound, they’re also seeing a solid, stable credit backdrop thanks to unspent Federal aid and record reserves.
That may add to munis’ strength as a bulwark, less impacted by the bank situation than Treasurys have been while still looking at the financials sector with caution in mind. Three different muni ETF categories ranked in the top fifteen ETF categories on YCharts based on one month returns, as well, suggesting recent strength and durability for the category.
Those factors may call for checking out actively-managed muni ETFs like the Avantis Core Municipal Fixed Income ETF (AVMU) and the American Century Diversified Municipal Bond ETF (TAXF). AVMU actively invests in investment-grade and high-yield municipal bonds to bolster portfolios with current income while reducing tax exposure. Charging 29 basis points (bps), TAXF has outperformed its ETF Database Category Average YTD and over the last three months by 62 and 22 bps respectively.
AVMU, from American Century’s Avantis Investors brand, actively invests in investment-grade munis, looking at factors like country and currency on top of duration and credit rating. Charging just 15 bps, AVMU has returned 101 bps YTD, adding $11.5 million in one month net inflows.
The muni ETF duo offers investors a pair of strategies with slightly different views on the muni bond space, which could be interesting tools in such an uncertain environment. For investors who are tired of the drama surrounding banks adding to already concerning rising rate anxiety, muni bond ETFs and their combination of current income and reduced tax exposure could be an appealing addition to a portfolio for 2023.
For more news, information, and analysis, visit the Core Strategies Channel.
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