Displaying items by tag: tax efficiency

In 2023, municipal bonds showed a recovery after a tough 2022, largely due to late-year rallies and shifts in Federal Reserve policy. However, the market has not fully rebounded, indicating ongoing opportunities in 2024. 

First, strong credit fundamentals are expected to persist, supported by substantial federal spending post-pandemic, leading to record tax receipts and rainy-day balances.

Next, strategically positioning across the yield curve offers chances to secure historically high yields, particularly in the long end, where steepening curves and higher yields prevail compared to U.S. Treasuries. Anticipated recovery in demand may see mutual fund inflows resume, especially for long-term funds and ETFs. Separately managed accounts (SMAs) are likely to remain popular among investors seeking customization and tax efficiency.

Finally, despite recent tactical investor decisions, municipal bonds continue to offer tax-free income, solid credit quality, and promising long-term returns, making them a strategic allocation option. Given current market conditions, entering the municipal bond market now may prove compelling for investors.

Finsum: Muni’s are leaving lots of options for investors on the table to tactically deploy in 2024. 

Vanguard is launching 2 new ETFs giving investors exposure to the municipal bond market. The Vanguard Intermediate-Term Tax-Exempt Bond ETF (VTEI) and the Vanguard California Tax-Exempt Bond ETF (VTEC) launched on the CBOE BZX Exchange and are designed to offer targeted exposure to certain segments of the muni market with an emphasis on quality and yield. 

Both also have low expense ratios of 0.08%, making them among the least costly within the muni fixed income category. The intermediate-focused, tax-exempt ETF is particularly timely given expectations that interest rates will decline in 2024 due to a dovish Fed and weakening economic outlook. Thus, many investors are looking to lock in yields at these levels by moving out from the short-end into the intermediate and longer-end of the curve. 

In addition to quality and generous yields, municipal bonds also have tax benefits. While VTEI is designed to appeal to a wider swathe of investors, VTEC is for investors who want exposure to California municipal debt. The yield generated from this ETF is tax exempt at the federal and state level for California residents while also prioritizing credit quality. 

Finsum: Vanguard is launching 2 intermediate-term, municipal bond ETFs that offer investors tax benefits in addition to income and quality.  

The most common reasons to choose a tax-deferred annuity are that it allows for accumulation while also ensuring security. Since taxes are delayed till retirement, there is more compounding to augment returns. Upon retirement, the annuity payouts begin. The downside is that these vehicles can underperform during periods when market returns are robust. Additionally, inflation above historical averages would also erode the purchasing power of annuity payouts. 

In contrast to tax-deferred annuities, immediate annuities involve a single lump-sum payment and then payments begin, typically, within a year of purchase. Deferred annuities work differently. After the purchase of the annuity, regular contributions are made. The value of the account grows due to these contributions and earned interest. 

Once the deferred annuity buyer is ready for payments, typically during retirement, the annuity seller begins making payments depending on the terms of the annuity and the total amount of funds accumulated in the account. 

Ordinarily, earned interest is taxed. This is not the case with a tax-deferred annuity. The result is more compounding and principal growth. However, taxes do have to be paid on income received from the annuity or on the accumulated interest, depending on the structure of the specific annuity. 

Finsum: Tax-deferred annuities offer certain advantages such as more accumulation and security. But there are also some disadvantages such as underperformance vs the broader market and inflation eroding the purchasing power of payouts.

Exchange-traded funds (ETFs) have revolutionized the asset management landscape over the past decade, and their rise shows no signs of slowing. As Oliver Wyman's 2023 report, "The Renaissance of ETFs," underscores, ETFs have become the single most disruptive trend in the industry. By the end of 2022, total ETF assets under management (AUM) in the US and Europe reached a staggering $6.7 trillion, propelled by a 15% compound annual growth rate (CAGR) since 2010.

While passive ETFs currently dominate the market, holding 59% of assets (at the end of 2022), Oliver Wyman predicts a surge of active strategies. The report posits that the ETF landscape is entering a "next stage of growth," fueled by the emergence of innovative active ETFs.

Several factors contribute to the enduring appeal of ETFs in the US. Compared to mutual funds, ETFs enjoy lower investment minimums, typically lower expense ratios, and attractive tax advantages, making them highly accessible and cost-effective options.

Oliver Wyman projects this momentum to continue, with ETF growth remaining in the 13-18% annual range for the next five years. By 2027, they expect ETF AUM in the US and Europe to reach an impressive $12-$16 trillion, solidifying their position as a powerful force shaping the future of asset management.

Finsum: Active ETFs are poised to fuel the growth of this popular investment vehicle, according to global consultancy Oliver Wyman.

According to Broadridge Financial, we are on the cusp of a meaningful shift in the wealth management universe as direct indexing represents the next evolution of passive investing. Over the last 20 years, we have seen exchange traded funds (ETFs) displace mutual funds as the primary vehicle for investing. Now, Broadridge believes something similar is happening with direct indexing. 

Some of the major reasons for this are low trading costs, fractional shares, and technology advances which make it accessible and practical for investors with much lower amounts to invest. Direct indexing assets are forecast to rise at a 12.4% rate over the next few years, outpacing ETFs, mutual funds, and SMAs. As a result, it’s becoming imperative to offer this service to clients who are particularly amenable to its tax optimization and personalization features.

Despite these trends, Broadridge reports that only 47% of executives and advisors were familiar enough with direct indexing to complete a survey about the subject. Additionally, only 14% of advisors currently recommend it to clients. According to the firm, advisors and practices should move quickly to embrace this technology as it has the potential to be a source of differentiation and value for clients. Client interest is especially high among Millennials and Generation Z due to their desire to align their investments with their personal values. 

Finsum: Broadridge Financial conducted a survey of advisors and executives about direct indexing. Despite promising long-term trends, it found that many are still not acting to embrace this opportunity.