The municipal bond market experienced fluctuations in 2024, with tax-free yields rising in response to Treasury yield movements, particularly in the latter half of the year. Market uncertainty increased following the Federal Reserve’s December rate cut, which coincided with ongoing inflation concerns and economic crosscurrents.
As 2025 begins, the potential extension of 2017 tax cuts under the new administration may impact demand for tax-free bonds, particularly if corporate tax rates are lowered. Climate-related risks, such as the LA fires and hurricanes, have drawn attention to municipal finance, with increased insurance costs and resilience measures potentially leading to more bond issuance.
Despite these pressures, municipal credit quality remains stable, supported by strong reserves, prudent budget management, and infrastructure reinvestment. However, challenges persist in certain sectors, including healthcare, higher education, and public K-12 schools, due to shifting demographics, rising costs, and expiring pandemic aid.
Finsum: These are important things to monitor for municipal bonds, and the increasing role of DOGE, could drastically change this bond segment.
ETF issuers are continually innovating to meet the demand for buffer strategies, appealing to financial advisors and clients who prioritize downside protection, even if it limits potential gains. Often dubbed "boomer candy" for their popularity among retirees, buffered ETFs offer a sense of security akin to a safety net for nervous investors.
The market for these ETFs has grown exponentially, with over 200 options managing nearly $46 billion in assets, a significant leap from just $200 million in 2018. These strategies typically shield against initial market declines, like the first 10%, while capping upside returns and are often tied to indices like the S&P 500.
Variations now include funds offering complete downside protection or innovative approaches like Calamos Investments’ product, which protects bitcoin’s price, but caps gain at 10%.
Finsum: Investors looking for stability particularly as they are aging could benefit from these strategies.
Municipal bonds, often overlooked, are gaining attention as fixed income performs strongly, prompting investors to reconsider their portfolios for 2025. Gregory Steier from Brown Brothers Harriman, highlighted that with elevated yields and record municipal issuance, risks are relatively low, making this an exciting time for munis.
Steier emphasized that, for 2025, high-quality municipal portfolios might even outperform equities. Munis are attractive for their liquidity, income, diversification, and tax efficiency, with national muni bonds offering advantages over state-specific ones.
Investors can access municipal exposure through ETFs like the ALPS Intermediate Municipal Bond ETF (MNBD), which focuses on bonds exempt from federal taxes, offering an active approach and strong returns, outperforming its benchmark.
Finsum: This strategy could be a compelling option for those seeking solid yields to kick off the new year.
Direct indexing allows investors to own individual stocks in a customized portfolio, offering tailored market exposure, tax-loss harvesting, and alignment with personal goals. Unlike ETFs, which can only tax-loss harvest during broad market declines, direct indexing captures tax benefits throughout the year.
Advisors increasingly use it as a core strategy for U.S. equity exposure, leveraging its tax advantages to offset gains from other parts of a client’s portfolio. Technology enables the efficient management of thousands of unique accounts, optimizing trades daily for greater customization and tax efficiency.
It is also a powerful tool for diversifying concentrated stock positions or preparing for future liquidity events by accumulating tax-loss reserves.
Finsum: When choosing a provider, factors such as investment performance, tax alpha, and client service are critical to the goals of direct indexing.
Strive Asset Management has launched direct indexing services on Fidelity and Schwab platforms, reaching a broad retail audience. These services emphasize daily tax-loss harvesting and pro-shareholder governance, avoiding ESG or DEI constraints.
Powered by Vestmark’s VAST technology, the initiative aligns with Strive’s anti-ESG philosophy, aiming to deliver superior financial outcomes for clients. CEO Matt Cole highlighted the unique value of Strive’s approach, citing frequent drawdowns in large-cap equities that offer tax-harvesting opportunities.
Founded in 2022 by Vivek Ramaswamy, now a key figure in President-elect Trump’s administration, Strive manages $1.7 billion in assets. Its ETFs focus purely on financial returns, contrasting with ESG-oriented funds by voting against ESG shareholder proposals.
Finsum: ESG and DEI oriented funds will have an uphill battle against the trump administration.
Municipal bonds have taken a significant hit after Donald Trump’s election as president, following a sharp selloff in U.S. Treasuries amid concerns over potential deficit-expanding policies and inflationary effects.
Benchmark municipal yields spiked, echoing the Treasury market’s movements as investors reacted to the likelihood of Trump’s economic plans impacting inflation. Many state and local governments had already rushed to issue bonds before the election, leading to high issuance in October, but new sales were sparse this week.
Despite the volatility, analysts like Lyle Fitterer of Baird predict bond issuance will recover in time, driven by the U.S.'s substantial infrastructure needs. A Republican victory also stirs concerns that tax cuts could reduce demand for tax-exempt municipal bonds, with JPMorgan analysts highlighting the risk to the tax-exemption status itself.
Finsum: It’s also worth noting how inflation is going to potentially affect these assets, because there is strong chance inflation will increase under the new regime.
Commonwealth Financial Network is enhancing its advisor platform with new tax-focused tools to improve efficiency and meet clients' evolving needs. This suite includes advanced planning solutions such as direct indexing, portfolio tax optimization, and unified managed accounts, providing advisors with tailored options for optimizing client portfolios.
In 2025, advisors will also have access to a managed CTO service to streamline technology management, allowing them to focus more on client relations. Additionally, tools like the tax transition feature and automated tax-loss harvesting will support tax-efficient investing for clients.
These upgrades are positioned to enable advisors to scale their businesses and better serve clients, particularly those with sophisticated financial needs.
Finsum: These types of innovations in wealth tech can vastly improve advisors options particularly with tax solutions.
Vanguard's ETFs offer excellent options for investors seeking both passive income and diversification. The Vanguard Value ETF, one of the largest value-oriented funds, holds mainly large-cap stocks with solid dividend payouts, keeping its top 10 holdings at around 21% of the portfolio.
For a more concentrated approach, the Vanguard Mega Cap Value ETF focuses on mega-cap companies, leaning toward value-heavy sectors like healthcare and energy, which tend to fare well in economic downturns. Investors aiming for higher yield might consider the Vanguard High Dividend Yield ETF, which offers broad exposure to 537 holdings and a nearly 3% yield without overemphasizing any single sector.
Although these funds have lagged the tech-driven S&P 500 recently, they have shown significant long-term growth, nearly tripling in value over the last decade.
Finsum: These ETFs suit different needs, whether one prefers a focus on industry giants or broader diversification for consistent passive income.
Switching to a new broker-dealer is often a complicated process, but finding the right partner can significantly improve your business and client service. Legal guidance is essential to avoid potential pitfalls, such as contractual issues or ownership disputes over client relationships.
Developing a comprehensive transition plan will help organize client accounts and ensure the process runs smoothly. Engaging your team early allows for shared responsibility and clear goals throughout the transition.
It’s also a good time to reassess your client base, streamlining relationships and services to align with your current practice. Finally, preparing client data properly and crafting a clear communication plan can help ensure a smooth and positive transition for everyone involved.
Finsum: Data, in particular, can be critical with the advances in information and technology.
Around two-thirds of active bond funds outperformed their average passive peers during the 12-month period ending June 30, according to Morningstar's latest Active/Passive Barometer. The report, which examines the performance of over 8,000 funds across various categories, highlighted that intermediate core bond funds led the way, beating passive funds 72% of the time.
These active bond funds benefitted from narrowing credit spreads and inflation that kept interest rate cuts on hold. However, over a 10- and 15-year horizon, only 45.5% and 15.9% of these funds outperformed, respectively.
Additionally, actively managed real estate funds outperformed their passive counterparts 66% of the time over the same 12 months, with U.S. and global real estate funds seeing strong short-term success.
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As the Federal Reserve signals more rate cuts, long-term municipal bonds (munis) are becoming increasingly attractive due to their competitive yields, tax benefits, and potential for price appreciation. Historically, long-term munis tend to outperform when the Fed shifts from a hawkish to a dovish stance, benefiting from falling interest rates.
These bonds also offer superior credit quality and often deliver higher tax-equivalent yields compared to taxable bonds, making them a strong alternative to Treasuries. With their longer durations, munis are particularly sensitive to rate changes, allowing for significant price gains in a falling rate environment.
Moreover, the increased issuance of municipal bonds this year has created a favorable buying opportunity, especially as tax reforms and higher marginal rates could further boost demand for tax-exempt investments.
Finsum: For investors looking to capitalize on rate cuts, long-term munis offer a compelling mix of yield, tax advantages, and credit stability
Advisors today face increasing challenges in helping clients achieve and maintain financial independence. With high U.S. stock valuations predicting lower future returns, and bond yields offering minimal real returns, portfolio strategies need to evolve.
Clients are also grappling with rising living costs, longer life spans, and elevated housing prices, creating greater financial strain. Factor investing offers a solution, selecting securities based on traits like momentum, quality, and low volatility, which have historically outperformed.
These strategies can be implemented cost-effectively through ETFs and optimized for tax efficiency within households. Although no factor guarantees success in every market, a diversified approach to factor investing provides a long-term opportunity for outperformance.
Finsum: Factor investing is robust proven strategy that can bring legitacy to new advisors or those looking to expand client adoption.
Goldman Sachs projects that the stock market could see a 15% rise by year-end if mega-cap tech stocks continue their strong performance. The bank argues that tech stocks are not currently in a bubble, as investors are focused on companies with profitable growth rather than speculative ones.
Goldman’s David Kostin notes that while long-term growth expectations for the S&P 500 are slightly above average, they remain well below levels seen during previous market bubbles. Despite concerns about the high concentration in a few tech giants, Goldman believes this is justified given their rapid growth compared to other S&P 500 companies.
The valuation spread between market-cap-weighted and equal-weighted S&P 500 indexes does not suggest bubble conditions, staying below historical extremes.
Finsum: We would look into more traditional measures like price to earning ratios if we are concerned about a bubble forming, rather than just long run growth.
Apollo Global Management Inc. is exploring the possibility of establishing a trading desk to buy and sell direct loans in the $1.7 trillion private credit market, which is typically illiquid. While the plans are still preliminary and could be abandoned, Apollo’s interest follows similar moves by other firms like Golub Capital and JPMorgan Chase.
These firms are actively trading private loans, although such transactions remain rare due to lenders' preference to hold debt until maturity. Concerns exist that increased trading could undermine the benefits of direct lending, such as privacy, convenience, and price stability.
However, secondary trading could be attractive to investors looking to enhance liquidity or reposition their portfolios. As the private credit market evolves, trading direct loans might become more common, especially for distressed assets.
Finsum: As a key figure in the space its important to keep an eye on the changes Apollo is making in private credit.