Northern Trust Justifies Mounting Muni Interest

In conjunction with Nasdaq, TMX VettaFi’s Head of Research Todd Rosenbluth co-hosted an Asset Allocation Summit webinar session focusing on the ever-evolving space of fixed income. With fixed income ETFs crossing $325 billion in inflows as of mid-October, there’s an obvious interest from investors. Dave Abner, Northern Trust Asset Management head of global ETFs & funds, provided additional intrigue as one of the webinar guests.

Market uncertainty is not an affliction isolated to just equities. Tariffs and geopolitical tensions are adding to the wall of worry for investors this year. However, the focal point of much of that uncertainty is interest rates. Using the CME Group’s FedWatch as a gauge, there’s an over 90% certainty level that the Fed will institute two more rate cuts before 2025 turns into 2026. The panel of speakers that included Abner was asked to provide their forecasts for rate cuts.

“We’d probably see two more towards the end of the year and we’re probably looking at another two in 2026,” Abner said, adding that there are three variables to look at. “You’ve got the jobs numbers, inflation, and you also have to pay attention to what happens with tax numbers (tax returns). So if investors are flush and they start to push prices higher, then we could see a different rate impact later in the year as well.”

Muni Interest Mounting

Muni ETFs have been a beneficiary of increasing interest in fixed income this year. With a combination of attractive yields and strong credit fundamentals, there’s still one prime reason investors flock to munis: their federal tax-free income.

“There’s one reason why you’re always interested in munis: People hate to pay taxes,” Abner told Rosenbluth. “They’re great citizens, they want to support society, but nobody wants to pay more taxes.”

“You’re going to get these tax-equivalent yields, which are even higher than you’re seeing in straight up Treasuries or other investments,” Abner added. He noted that default rates in munis are also extremely low.

It provided the perfect opening for Abner to introduce the three muni funds from Northern Trust. Together they represent the full spectrum of the yield curve:

1. Northern Trust Short-Term Tax-Exempt Bond ETF (TAXS): seeks investment results that correspond to the ICE Short-term Focused Municipal Bond Index (Underlying Index). It’s an ideal option for investors seeking tax-exempt income by way of munis with short-term maturities (1-5 years).
2. Northern Trust Intermediate Tax-Exempt Bond ETF (TAXI): seeks investment results that correspond to the ICE Intermediate Term Focused Municipal Bond Index (Underlying Index). TAXI is ideal for those looking to munis with intermediate term maturities (1-15 years).
3. Northern Trust Tax-Exempt Bond ETF (TAXT): seeks investment results that correspond to the ICE All Maturity Focused Municipal Bond Index (Underlying Index). It provides an ideal path for investors looking to get broad-based muni exposure across the full yield curve. As Abner noted, this is one of the more popular funds. It provides “the total muni market in one ETF.”

Furthermore, they present cost-effective options with each fund offered at fi5ve basis points, which is 14 basis points below the FactSet segment average.

“We’re talking about saving money in taxes, you also want to maintain your fee exposure,” Abner said. He stressed the competitiveness of the expense ratios of these funds relative to their competition.

The ‘Flippening’

To round out the webinar, panelists discussed how fixed income slots into an investor’s portfolio. As mentioned, it’s been a record year of inflows into fixed income ETFs. That could be an early indicator of what’s to come for the marketplace. Abner provided a window into what he sees for the future.

“The fixed income markets are huge,” Abner said. “If you look at the ETF world, it’s sort of reversed. The amount of assets in equity ETFs dwarfs the amount of assets in fixed income ETFs.

“I think we’re now seeing that balancing, and what I call the ‘flippening’ is coming,” Abner added. “Over the next five to 10 years, you’re going to see fixed income ETFs start to dwarf equity assets.”

Click here to watch the full webinar and earn continuing education (CE) credits in the process.

Originally published by Advisor Perspectives

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