30 April 2024

Navigating Today’s Rate Uncertainty with Short-Duration Muni ETFs

3 min read

As the Fed watch continues, investors leery about volatility in interest rates should consider the sizable yield and tax efficiency of the AB Tax-Aware Short Duration ETF (TAFI).


Key Takeaways:

AB’s Tax-Aware Short Duration ETF (TAFI) offers advantages, including:

  • Compelling after-tax yield versus money-market funds’, especially for high earners
  • Liquidity benefits that complement other investment vehicles
  • Ability to navigate interest-rate volatility

Each jobs and inflation report keeps all eyes fixed on the Fed: When will rate cuts finally start?

As for the actual direction and size of rate moves—that’s anyone’s guess too. We think investors weary of interest-rate volatility should take a look at AB’s Tax-Aware Short Duration ETF (TAFI). With its sizable yield and modest duration exposure, investors have access to a portfolio that we believe is positioned to deliver positive returns in most market environments while minimizing losses and providing maximum tax efficiency.

Elevated Yield Offers Strong Relative Value

Tapping into today’s higher yields can make a big difference, and we believe that TAFI is up to the task. Its yield-to-worst of 3.78% (SEC yield of 3.31%) as of March 31, 2024, is 29 basis points (bps)2 above the 3.49% of the Bloomberg Municipal Bond Index. On a tax-equivalent basis, TAFI’s yield-to-worst is a sizable 6.13%. What’s more, its duration is only 43% of the broad municipal bond index’s duration.

The performance data quoted represents past performance and is no guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For the current standardized performance and the most recent month-end performance, please visit the Fund’s website.

For investors looking to “hop” into cash, TAFI’s yield tops most cash-equivalent vehicles, such as money-market funds and T-Bills, on an after-tax basis. And it seeks to takes advantage of the strong relative value at the short-term segment of the muni yield curve. Essentially, investors can potentially receive an impressive “bang for the buck” through elevated yield and low exposure to interest-rate volatility.

Tax Efficiency and Liquidity? Yes.

Investors new to money-market funds—especially those in the highest tax bracket, might be surprised by the heavy drag of taxes on returns. TAFI holds an after-tax advantage on that front, because the majority of the Portfolio’s assets are tax-exempt municipal bonds (Display).


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Every year, many investors with separately managed accounts (SMAs) must raise money for expenses—including tax payments. TAFI’s tax efficiency helps ensure minimal capital gains distributions—in fact, it hasn’t paid any capital gains since its inception. And because TAFI is an ETF, investors should see lower transaction costs than those resulting from trading individual muni bonds, while also getting their cash quickly (T+2 settlement). That helps make TAFI an effective vehicle for the liquidity sleeve of a diversified SMA portfolio.

An Important Cushion Against Interest-Rate Volatility

In addition to possessing an elevated yield, we believe investors in TAFI can benefit from a cushion against losses if rates rise. While this is not our base case expectation, it’s challenging to accurately predict the direction of rates with complete certitude.

TAFI: An Active Solution in a Passive-Dominated Landscape

In the short-duration ETF category, TAFI’s biggest competitors are passive providers striving to replicate indices. TAFI is very different. With diversified exposure to muni credit, a tactical allocation to taxable bonds, and dynamic yield-curve and duration adjustments, in our view, TAFI’s built-in flexibility gives it the potential to outperform in every market environment.

For clients looking to take a step into duration before the Fed starts cutting rates, we think TAFI provides a compelling solution.

2 Basis Point: one hundredth of one percent, used chiefly in expressing differences of interest rates

Investing in ETFs involves risk and there is no guarantee of principal.

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Investors should consider the investment objectives, risks, charges and expenses of the Fund/Portfolio carefully before investing. For copies of our prospectus or summary prospectus, which contain this and other information, visit our Literature Center or contact your AB representative. Please read the prospectus and/or summary prospectus carefully before investing.

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Below-Investment-Grade Securities Risk: Investments in fixed-income securities with lower ratings (a/k/a junk bonds) are subject to a higher probability that an issuer will default or fail to meet its payment obligations. These securities may be subject to greater price volatility due to such factors as specific municipal or corporate developments and negative performance of the junk bond market generally and may be more difficult to trade than other types of securities.

Bond Risk: The Fund is subject to the same risks as the underlying bonds in the portfolio such as credit, prepayment, call and interest-rate risk. As interest rates rise, the value of bond prices will decline.

Derivatives Risk: Derivatives may be more sensitive to changes in market conditions and may amplify risks.

Municipal Market Risk: Economic conditions, political or legislative changes, public health crises, uncertainties related to the tax status of municipal securities, or the rights of investors in these securities may negatively impact the yield or value of a municipal security.

Tax Risk: The US Government and the US Congress may periodically consider changes in federal tax law that could limit or eliminate the federal tax exemption for municipal bond income, which would in effect reduce the income received by shareholders from the Fund by increasing taxes on that income.

New Fund Risk: The Fund is a recently organized, giving prospective investors a limited track record on which to base their investment decision.

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