The Federal Reserve reduced its benchmark rate by 50 basis points on September 18, and additional cuts are expected in the coming quarters. As a result, investors, especially those in higher tax brackets, may consider investing in municipal bonds to take advantage of the upward price trend resulting from lower rates and the tax benefits that taxable bonds offer.

Investors looking to make that first move out of cash, should take a look at AB’s Tax-Aware Short Duration ETF (TAFI). With its 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.

Stronger 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 3.38% (SEC yield of 3.15%) as of August 31, 2024, is above the 3.33% of the Bloomberg Municipal Bond Index, despite having much lower duration. On a tax-equivalent basis, TAFI’s yield-to-worst is 5.71%¹. What’s more, its duration is only 37% 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 that of most cash-equivalent vehicles, such as money-market funds and T-bills, on an after-tax basis. Essentially, investors can potentially receive an impressive “bang for their buck” through higher 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)².

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. That helps make TAFI an effective vehicle for liquidity and cash management. Investors may choose to pair TAFI with a diversified SMA portfolio as a liquidity sleeve.

Seeking to Mitigate Interest-Rate Volatility

We believe investors can benefit from TAFI's strong yield and its 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: Embrace the Power of an Active ETF in a Passive-Dominated Landscape

Passive Muni ETFs generally follow indices with constrained editability requirements. This can result in excluding higher yielding municipal sectors such as AMT bonds, healthcare, hospitals, student loans, charter schools, prepaid gas and private activity bonds. These sectors play a crucial role in providing essential services to the community, and their complete exclusion may result in missed opportunities. By employing active management and conducting bottom-up due diligence research, we believe that these sectors can be a valuable addition to an investor's diversified municipal portfolio.

TAFI’s active management should benefit investors over a full market cycle given its portfolio flexibility.  This is achieved through active management tools, such as, duration/yield curve positioning, a strategic weighting to municipal credit, and a tactical allocation to taxable bonds when munis are trading high. Passive index providers adhere to strict rebalancing rules to maintain the composition of the index. In a fragmented market such as munis, this leaves opportunities on the table that active management can exploit. TAFI is a liquid, tax efficient and cost-effective way for municipal bond investors to gain exposure to the municipal bond market.

¹ Assumes top tax rate of 40.8%

^{2 Alternative minimum tax (AMT) may apply and any income earned on non-municipal securities in the Fund would not be exempt from federal income tax}