FMB Portfolio Breakdown
MUB Portfolio Breakdown
So far this year, FMB has outperformed MUB, as the chart below shows:
MUB Vs. FMB YTD Performance
Chart courtesy of StockCharts.com
Active Vs. Passive Individual Choice
But when it comes to picking passive or active management in an ETF wrapper, there’s no right or wrong mousetrap. As CreditSights municipal strategist Patrick Luby puts it, it all boils down to individual investor goals.
When does it make sense to choose a passive approach to munis versus an active muni ETF? Luby offers the following guidelines:
“For investors with existing portfolios of individual bonds who want to have access to the exchange-traded liquidity that comes with ETFs, it may be difficult to build an investment policy around the bond portfolio plus an active strategy. It can be done, but requires comfort with both the specifics of building a fixed income portfolio as well as the mechanics of the ETF marketplace.
“On the other hand, for investors who are in the wealth-accumulation phase, an actively managed fixed income ETF could be a really great solution because it delegates to the portfolio manager the ability to react to prevailing market conditions in a way that cannot be done when constrained by an index. As a ‘core’ position for the investor accumulating assets, ETFs can be a great solution, and actively managed ETFs would be especially appropriate to consider in that situation.”
Opting for an active strategy in the muni market, he adds, shouldn’t be driven by the notion that the muni market is inefficient, but by a conviction that your chosen professional manager may be able to better navigate changes and opportunities in the market.
Do Your Homework
To that end, manager due diligence is crucial to your process of finding the right ETF, “because it is that experience that the ETF investor is looking to guide their money through economic and interest rate cycles,” Luby said.
That’s especially true because you’ll also be paying a lot more for the access. FMB’s active approach comes with a 0.50% expense ratio versus MUB’s 0.07% price tag. You are paying 7x the passive choice’s cost for that chance to capture outperformance. It goes without saying that having conviction in your manager is really important.
For a complete list of muni ETFs, check out our muni ETF channel.
Contact Cinthia Murphy at [email protected]