Remembering Bogle: A New Standard for Municipal Investing

Multiple decades have passed since John “Jack” Bogle revolutionized investing and taught us that index-like returns should be the bare minimum our clients should expect from their portfolios. High-fee products that couldn’t generate long-term outperformance no longer met “the standard.”

Since then, indexing strategies have grown exponentially, particularly within ETFs. If an investor felt their manager was not meeting their expectations of index-or-better returns, there were many substitutes that could.

Municipal bonds, a fragmented asset class, was slower to mature in the passive trend. For a long time, many considered the concept of “municipal indexing” an oxymoron.

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Because with nearly 1 million bonds in this market, every buy decision within a portfolio presents a large benchmark-relative overweight and therefore benchmark-relative risk.

Even Vanguard offered only active strategies for municipals for decades.

However, recent improvements in technology, data, systematic trading and risk analytics have enabled a more effective set of conditions for municipal indexing to be successful.

Flows have acted accordingly. Assets in passively managed municipal ETFs stand at $118 billion, nearly tripling over the last five years.

Over this time, the number of ETF products hasn’t expanded as rapidly. Instead, the rise in assets is attributable to incumbent products becoming larger, more diversified and more liquid.

Just as it did for other asset classes decades ago, indexing is now setting the “Bogle standard” for municipal investing: Do not settle for less than index-level returns!

Investors now have a variety of at-scale passive municipal strategies at their fingertips across investment-grade state and national exposures.

Regardless of vehicle (mutual funds, ETFs, direct bond purchases and SMAs), high earners should recognize the evolution of this market, with this new standard for municipal investing, and reassess their expectations for investment outcomes.

Our clients should now be asking for more from their municipal investments, unwilling to compromise for anything less than index-or-better returns.

A few last thoughts to round out the picture:

• We use the phrase “index-or-better returns” to capture the idea that active managers are still highly valuable in this fragmented market, but investors should require such managers to outperform over full market cycles net of fees.
• Some managers will deliver excess beta within supposed investment-grade strategies and call it alpha. Be discerning, look at benchmark-relative drawdowns and ensure the strategy is what you think it is.

All investing is subject to risk, including the possible loss of the money you invest.

Although the income from a municipal bond fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund's trading or through your own redemption of shares. For some investors, a portion of the fund's income may be subject to state and local taxes, as well as to the federal Alternative Minimum Tax.

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