After implementing the first interest rate cut of the year, the prospect of further easing by the U.S. Federal Reserve could make fixed income investors nervous. However, they can seek higher yields while mitigating credit risk through an active exchange-traded fund: the MFS Active Intermediate Muni Bond ETF (MFSM).
The CME Group FedWatch indicator is already forecasting an over 90% chance that the Fed will cut rates again in October and December. While the Fed’s decisions will undoubtedly be data-dependent, members are also anticipating rate cuts ahead.
“I anticipate additional cuts over the next three to six months, and the incoming data will drive the pace of rate cuts,” noted Federal Open Market Committee Christopher Waller during an August speech in Miami, FL.
With the prospect of rate cuts applying downward pressure on yields offered from cash, this gives investors an opportunity to reallocate their fixed income portfolios towards a fund like MFSM. The focus of the fund is to target intermediate maturity municipal bonds, which can be beneficial in today’s interest rate environment as the U.S. Federal Reserve resumes its easing of monetary policy. Investors accustomed to the higher yields on cash and short duration bonds over the past few years can reach for more income, on an absolute and tax-equivalent basis, by stepping further out on the yield curve with intermediate bond exposure. They can also do so with the inherent benefits of municipals, such as federal tax-free income and stronger credit fundamentals relative to riskier debt like corporate bonds.
A Muni ETF With an Active Edge
The investment case for municipal bonds extends beyond getting federal tax-free income. As mentioned, strong credit fundamentals coupled with attractive yields further support the case for munis exposure. Another component is paramount in an asset class as large and fragmented as municipals: active management.
The municipal bond space presents its own unique set of risks and nuances, best navigated by those experienced in this particular corner of the bond market. This is where a fund like MFSM is ideal. The fund’s portfolio managers and analysts carry a plethora of experience in the often-complex world of municipal bonds.
“MFS has been investing in municipal bonds since the 1970s,” the fund’s product website noted. The fund benefits from the experience of a 20-member team (including attorneys embedded within the investment team) and from its integrated global investment platform.
Emphasizing a research-oriented approach to identify opportunities, the MFS team scans the broad muni universe to generate alpha, whether via credit selection, quality, sector allocation, or duration/curve positioning.
For more news, information, and strategy, visit our Portfolio Construction Content Hub.
