We all know we should work on and improve our core, but how many of us have the discipline to do it? I interviewed two financial advisors who are strengthening their core by using municipal bond indices and the ETFs that track them.
Matt Papazian is founding partner and CIO at Cardan Capital Partners of Denver, Colorado, and Tom Cartee is a financial advisor and portfolio manager at Sheets Smith Wealth Management of Winston-Salem, North Carolina.
S&P DJI: Has the availability of indices or beta for municipal bonds changed the way that you are able to use municipal bonds?
Matt: Yes. The ability to move weightings seamlessly between credit and duration is a great benefit of these new offerings. We are now able to access the high-yield municipal bond space with ease, something we would not normally do with individual bonds. Because of the historically low default rate in the municipal bond space, including high-yield bonds, we view access to different segments of the municipal bond market as an integral part of how we invest.
Tom: I agree with Matt. I like to use equity ETFs based on broad indices as the core building blocks of client portfolios. Municipal bond ETFs enable me to use a similar low-cost, broadly diversified approach to fixed-income allocation within taxable accounts.
S&P DJI: We’ve observed robo-advisors using core municipal bond ETFs within even the most basic asset allocations and at every level of client investment. Are you finding it easier to deliver this asset class to the smaller clients you work with?
Matt: For smaller market participants, ETFs provide a substantially more efficient way to invest in tax-free bonds. Small trades in bonds are generally quite expensive for small market participants, even if they don’t see the fee, so ETFs have leveled the playing field for them.
Tom: Trading small lots of individual municipal bonds is not very efficient. The liquidity available with municipal bond ETFs offers a compelling reason to emphasize ETFs over individual bonds in smaller accounts.
S&P DJI: What are your thoughts on combining index-based municipal bonds with individual municipal bonds?
Matt: Although the majority of our municipal bond investing is done with ETFs, we view individual bonds as a valid way to get exposure to the space for larger investors, but we prefer ETFs for their liquidity and low transaction cost. We also avail ourselves of closed-end funds when the values are compelling.
Tom: Again, I agree with Matt. ETFs offer many advantages. Because tax rates vary from state to state and liquidity needs vary among market participants, advisors may decide to use municipal bond ETFs alongside individual bonds in certain accounts. The key is to recognize that municipal bond ETFs can be the core, given their favorable characteristics.
My thanks to Matt and Tom for participating in this interview and in a recent webinar on core municipal bond investing that is now available in our webinar archive.