High-tax bracket investors are becoming increasingly interested in enhancing their portfolio’s income through municipal bond funds. Why are municipal bond funds suddenly so appealing? U.S. News & World Report recently spoke with Delegate Advisors Co-Chief Investment Officer Dunkin Allison to answer this question.
According to Allison, municipal bond funds have recently experienced relatively strong returns due to a combination of two important factors: a solid U.S. economy with low unemployment, and a low supply combined with a strong demand because of a historically low-interest rate environment.
However, not all municipal bond funds have the potential to add value to an investor’s portfolio. As a result, Allison examines each bond closely by looking at credit quality versus its risk, duration and cost before investing in a municipal bond fund.
With these aspects in consideration, Allison currently favors short-duration bond funds with five years or less to maturity, given today’s interest rate environment. Specifically, Allison tells U.S. News & World Report that he sees the most potential in actively managed bond ETFs where opportunities exist for portfolio managers to perform better than their benchmark. Allison explains that in a low-return environment, costs are important when looking at actively managed funds, which usually have higher fees than passive ETFs.
“If you’re paying that’s 1% or more, you’re eating into a tremendous amount of return,” explains Allison.