On this episode of the “ETF of the Week” podcast, VettaFi’s Head of Research Todd Rosenbluth discussed the Capital Group Municipal Income ETF (CGMU) with Chuck Jaffe of “Money Life.” The pair talked about several topics regarding the fund to give investors a deeper understanding of the ETF overall.

Chuck Jaffe: One fund, on point for today. The expert to talk about it. This is the ETF of the Week. Welcome to the ETF of the Week, where we get the latest take from Todd Rosenbluth, the Head of Research at VettaFi. And if you go to VettaFi.com, you’ll find all the tools you need to be a savvier, smarter ETF investor, and to get more details on the new, newsworthy, trending, and timely ETFs that we talk about here.

Todd Rosenbluth, it’s great to chat with you again.

Todd Rosenbluth: It’s great to be with you, Chuck.

Chuck Jaffe: Your ETF of the Week is…

Todd Rosenbluth: The Capital Group Municipal Income ETF. Ticker CGMU.

Chuck Jaffe: CGMU. The Capital Group Municipal Income ETF. You know, Todd as the rate cycle changed, we talked a lot about fixed income ETFs. But we haven’t talked a lot about munis. And now here we are, on the cusp of a rate cutting cycle that may be beginning soon. So, why this fund now?

Todd Rosenbluth: Well, you’re right, I’ve been doing this with you, and obviously my predecessor has been doing this. I don’t recall a municipal bond ETF being focused on in this segment, but why CGMU? Well, in July, it had a tremendous month. The assets under management doubled in size. It gathered more than $1 billion. The fund is now over $2 billion.

Municipal bonds can serve a great purpose within a broadly diversified portfolio for that tax free income. This is a national fund, which means it owns bonds issued in New York, where I am, in California, where many listeners are. Pennsylvania, what have you. We think this is a great way of getting exposure, and it’s actively managed. We’ll talk more about that, I’m sure.

Chuck Jaffe: Is there – I mean, that kind of growth that quickly is unusual for any fund, particularly a muni fund. Why? And and is there any reason to be alarmed when that much money floods in?

Todd Rosenbluth: So, I’m not alarmed by it. Capital Group is a relatively new entrant into the ETF market. Although it’s very quickly gathered, it has over $30 billion in assets under management in just a short period of time. Less than three years having an ETF presence. Capital Group has been rolling out products on a staged basis. Advisors have been adopting them and getting more comfortable with them, and this ETF has now been around long enough.

We believe it’s also likely to be used in model portfolios that have a tax free strategy and offer exposure that are focused on active management. So, I expect the money to be moved into the fund to stay in this fund. And we’re going to continue to see investor adoption. What we found is that actively managed ETFs have been gaining traction in 2024, as large firms like Capital Group and others have entered and brought their best ideas, their best portfolio managers into the ETF marketplace.

We think this is a great fund to get exposure to the tax free universe.

Chuck Jaffe: Muni bonds can be an acquired taste for folks who have been generally broadening out fixed income, lengthening maturities and all the rest. They may not have any muni exposure. So, roughly how big a position do they want? And do they — if they already have a muni fund and they’re just hearing us talk about a muni fund for the first time, do you really want to diversify when it comes to fixed income in a tight space like munis?

Todd Rosenbluth: So let me tackle that in a couple of different ways. There are some advisors, some investors, that want to have a tax free sleeve within their fixed income allocation, or just have their fixed income allocation be entirely focused on tax free investments from a national level. And if you are that type of investor, this is a good fund to serve as a core.

It’s has an intermediate time horizon. Its duration is 5 or 6 years. it holds investment grade bonds spread across the spectrum, primarily investing in revenue bonds. So this could be a great core within the tax free part of your fixed income portfolio. What we find is that most of the money that’s in tax free municipal bond ETFs, they’re index based, whether that’s iShares or that’s Vanguard.

Those are broadly diversified, not a best ideas portfolio. It owns everything that is investment grade oriented. What I’ve been encouraged by is that the Capital Group fund has outperformed those funds, those index based products, in the past year. So it can serve as a complement to those strategies. To give you a bit more of an alpha, an opportunity to outperform, as opposed to just having broad exposure to the tax free, investment grade world.

Chuck Jaffe: What kind of yield is this fund generating? I mean, nobody should be looking at a fixed income fund without at least considering the yield.

Todd Rosenbluth: So, you certainly want to do it on a tax adjusted basis that I’m not about to do on on the fly here. But it’s a competitive yield. It’s I believe over 3% on a traditional taxable basis. So, it’s yielding quite strong. we think it’s encouraging for investors to be sure they’re getting the balance of risk and reward.

But, you obviously want to make sure. You don’t want to necessarily choose just the highest yielding of those bond ETFs. Obviously, if you take on more risk you’re going to get paid for that. So we think this offers a nice balance.

Chuck Jaffe: And in terms of the muni space. You know, there was a time a couple of years ago where people were looking at munis thinking there’s trouble ahead. Whether it was bonds for the state of Illinois, or Detroit, Michigan, or Puerto Rico. There was a lot of talk about how certain municipalities might be in trouble, and then they kind of work themselves out of it. And those problems went away.

But we live in a world where it’s politically contentious, and bailing out municipalities and the rest would certainly be a problem if it were to happen. Do you have any political or bond security worries when it comes to the muni space?

Todd Rosenbluth: So, I don’t think that we have those same headline issues that you touched on earlier. I don’t believe there’s any states or municipalities that are in the same danger. But that’s the benefit of having active management. To be able to do credit analysis on each issuer and each issue, to make sure it fits in well within the broader portfolio. So that’s why an actively managed municipal approach like CGMU could make a lot of sense for investors.

Chuck Jaffe: And that’s why CGMU, the Capital Group Municipal Income ETF, is the ETF of the Week from Todd Rosenbluth at VettaFi. Todd, great stuff. Thank you so much. We’ll talk to you soon.

Todd Rosenbluth: It’s great to be with you, Chuck.

Chuck Jaffe: The ETF of the Week is a joint production of VettaFi and Money Life with Chuck Jaffe. And yeah, I’m Chuck Jaffe and I’d love it if you check out my hour long weekday show by going to your favorite podcast app, or by looking for it at MoneyLifeShow.com.

And if you’re looking for the best ETF information out there, make sure you look no further than VettaFi.com, where they’ve got all the tools you need to become a better investor.

They’re on Twitter at @Vetta_Fi, and Todd Rosenbluth, their Head of Research, my guest, he’s there too, at @ToddRosenbluth. The ETF of the Week is here for you every Thursday. Make sure you don’t miss an episode by following along on your favorite podcast app. We’ll see you again next week, and until then, happy investing!

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