The Active Edge: How AB’s Muni ETFs Navigated Tariff Turbulence
Key Takeaways
- When municipal markets turn volatile, passively managed ETFs may struggle to adjust to rapidly changing market dynamics.
- Actively managed ETFs are equipped with an expansive toolkit that enables them to adapt in real time to manage risk and tap opportunity.
- AB’s actively managed suite of municipal bond ETFs—TAFI, TAFM and TAFL—embody this agility, and it showed during the tariff shock.
Tariff Turmoil Highlights the Need for Active Muni Solutions
When markets turn volatile, the flexibility of an ETF—or lack of it—matters. Passive municipal bond ETFs, designed to replicate the performance of a market index, lack the ability to adjust quickly to fast-changing markets. Actively managed ETFs are built different: with their duration and yield-curve management, sector rotation and ability to capitalize on pricing dislocations, they’re well-equipped to adapt in real time.
AB’s actively managed suite of municipal bond ETFs embody this agility. Our solutions aren’t bound to an index, so they have the latitude to take advantage of opportunities that spring from unsettled markets selectively adding exposure when valuations become more attractive. That flexibility is critical when shocks—like the rollout of new tariffs—shake things up.
AB’s Muni Solutions: Agility and Flexibility for Unsettled Markets
April’s Volatility: A Wake-Up Call…and Case Study
April was a wake-up call for many bond investors. After a solid start to the year, the US economy and markets stumbled as concerns about the impact of tariffs mounted. April’s broad selloff didn’t spare municipal bonds, and passive ETFs bore the brunt of the pain. Bound by their index mandates, they couldn’t reposition to mitigate the downside or take advantage of temporary market dislocations.
Active muni ETFs were equipped to adjust in real time, and the AB Tax Aware Intermediate Municipal ETF (TAFM) was a case in point. Heading into April, it carried a tactical duration-weighted underweight to municipals. As the ratio of municipal yields to Treasury ratios surged, TAFM’s positioning reduced downside exposure, enabling it to avoid some of the pressure faced by passive municipal ETFs. The portfolio then selectively increased its municipal duration target during the month, stepping in to provide liquidity for the municipal market at attractive levels.
TAFM’s active edge enabled it to outperform the two biggest passive intermediate municipal ETFs, together accounting for 94% of passive ETF assets in the Morningstar Municipal National Intermediate product category. The excess performance of 15 bps was meaningful in a month when every basis point mattered. Helped by that showing, TAFI has outperformed the average return of those two passive giants by 61 bps year to date through May 31.
AB’s Tax Aware ETF Suite: The Active Edge
AB’s Tax Aware ETF Suite includes three ETFs: TAFI, AB Tax-Aware Intermediate Municipal ETF (TAFM) and AB Tax-Aware Long Municipal ETF (TAFL). Each follows the same robust investment process and philosophy, and targets a different segment of the yield curve. They’re all able to make crossover trades, reducing municipal exposure when it’s expensive and pivoting into taxable bonds to enhance risk-adjusted returns.
These capabilities will be critical in 2025, with tariff-policy uncertainty and technical conditions expected to play a larger role in municipal pricing. The case for active muni ETFs remains strong in a low-growth, highly uncertain world where being nimble makes a difference. Bond-market volatility is always lurking—when it strikes, investors will need more than a benchmark strategy—they’ll need an edge. AB’s active muni ETFs stand ready for the challenge.
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AL-755237-2025-06-13