So you’ve just paid your annual tax bill (ugh). Now what? You may be wondering how to get ahead of more tax-efficient investing this year. A first step could be to explore municipal bond investing.
Municipal bonds — loans issued by states, cities, counties, municipalities, educational institutions, and other non-profits — diversify your portfolio, having historically been a ballast when equity markets took a downturn. And they generate tax-exempt income, on the federal and sometimes even state level. But the benefits don’t stop there. When chosen carefully and intentionally, “muni” bonds can also provide unique opportunities for investors to make a direct, measurable impact in communities where it’s needed most.
The two types of municipal bonds
There are two main categories of municipal bonds: revenue bonds and general obligation bonds. Each type is designed to serve a different purpose in the public sphere.
These bonds are backed by revenues from a specific public works project, like a toll road, bridge, mass transit, or sewage and water improvements. Fairly straightforward.
General obligation bonds
General obligation bonds aren’t tied to one project, and can be used for many and multiple purposes — like repairing roads, improving parks, and so on. They’re backed by the full faith and credit of whatever government entity issued them, like the State of California or the City of Austin. (That credit is scored by rating agencies like S&P and Moody’s.) General obligation bonds’ principal and interest are typically honored and fulfilled using money from the collection of property taxes, and sometimes other things like sales taxes as well.
Not all municipal bonds are created equal
Because muni bonds exist to finance public works and essential services, people often assume that muni bonds all qualify as impact investments. (Why wouldn't we expect an education-focused municipal bond to have a positive impact on the world?)
Yet while that may be true in many instances, it’s not always the case. Proceeds from muni bonds can be used in a lot of different ways no matter how the bond’s described, and some have a much more direct positive impact than others. For example, that education bond mentioned above might end up being used to:
Refinance an older bond, where the money repays principal and interest to existing bondholders. (This has no direct positive impact.)
Finance a new gym at a high school in an affluent community. (This has some positive impact — but for whom? And how much is education-related?)
Finance capital improvements to classrooms and facilities at an elementary school in a low-income neighborhood. (This, of course, has the greatest positive impact, and is what many people likely imagine when they think about doing good by investing in municipal bonds.)
So how can Ellevest Private Wealth clients make sure the municipal bonds in their portfolio are as impactful as possible? Enter: the Ellevest Municipal Impact Strategy, managed by AllianceBernstein®.
The Ellevest Municipal Impact Strategy, managed by AllianceBernstein®
Ellevest’s fixed-income impact offering is designed for impact like the capital improvements described in that third scenario above.
What it is and how it works
The Ellevest Municipal Impact Strategy*, managed by AllianceBernstein®, focuses on muni bonds designed to close gaps in underserved and under-resourced communities, relying on a “use-of-proceeds” approach to evaluation.
First, AllianceBernstein® conducts rigorous credit and financial analyses of the issuer of each bond considered. Then they scrutinize how each bond’s proceeds will be used, and evaluate its expected impact in that under-resourced community — how directly will this money help close a social or environmental gap? Afterward, they measure the results of each bond to determine whether that impact actually came to fruition. (That individual-bond evaluation part is key, because not every bond from the same issuer will have a big impact; some will be more effective at closing those gaps than others.)
Benefits beyond impact
Just because you’re investing for impact doesn’t mean you aren’t investing for returns, too. And the Ellevest Municipal Impact Strategy, managed by AllianceBernstein®, can be a smart option for your portfolio — even as interest rates rise in our current economic climate.
Helping to offset equity risks
While bond prices drop as the Federal Reserve raises interest rates, bonds still have a key role to play in a diversified portfolio. In general, when other markets take a downturn, investors still tend to flock to more historically stable assets — like bonds — to diversify, because they can serve as ballast when equity markets hit choppy waters.
It’s also likely that individual taxes will rise in the coming years, especially for those with high incomes, which would make these bonds’ tax-exempt income even more attractive. The yields on muni bonds are also driven in part by supply and demand, which means they’ve historically outperformed other types of bonds, even when rates rose.
Protecting against the whims of other investors
When you’re invested in a publicly traded mutual fund, you get instant diversification across many different bond positions, but you’re also exposed to the behavior of all the other investors in the fund. If a significant number of them get spooked and start selling (for any number of reasons, rational or not) the fund manager may need to sell bonds they’d otherwise want to hold — at distressed prices — in order to make the necessary payouts. The remaining shareholders in the fund (you) would ultimately be left to pay the price. (This is more likely to occur with extreme events and smaller funds.)
That’s not the case with the Ellevest Municipal Impact Strategy, managed by AllianceBernstein®. Instead, you hold individual issues and shares in a privately held mutual fund. Alliance Bernstein may still buy and sell bonds, but when they do, it’s for fundamental reasons related to financial condition or impact — not in response to other investors’ behavior.
Less selling also helps protect you from interest rate risk. When a bond’s held to maturity, with interest collected along the way, it matters far less how bumpy the ride is.
Peace of mind
With the Ellevest Municipal Impact Strategy, managed by AllianceBernstein®, you can feel better about two things: proper diversification in an uncertain financial climate, and your ability to make a meaningful, positive impact on the communities your investments fund.
If you’re interested in learning more, let’s talk. Connect with an Ellevest Private Wealth advisor.
© 2022 Ellevest, Inc. All Rights Reserved.
The Ellevest Municipal Impact Portfolio (“Portfolio”) is a separately managed account that is sub-advised by AllianceBernstein Holding L.P. (“AB”), a SEC registered investment adviser.
The Portfolio is a national municipal investment strategy comprised of individual municipal positions (approximately 55%) and an allocation to a diversified pooled fund of municipal bonds (approximately 45%). The Portfolio will include issuers from different states and not be limited to issuers from a single state. Hence, income generated by the investments in the portfolio will be tax exempt from Federal taxes, but only positions issued by the client’s state of residence, if any, will be exempt from state tax.
The impact objective of the strategy is to deliver positive social and environmental impact in sectors including but not limited to education, healthcare, low carbon/renewable energy, mass transit, water/wastewater management, and economic/community development. The Sub-advisor pursues its objective by investing principally in high-yielding municipal securities of any credit quality that (i) score highly on the Sub-advisor’s environmental, social and corporate governance (“ESG”) criteria (which can be made available upon request) and (ii) are deemed by the Sub-advisor to have an environmental or social impact in underserved or low socio-economic communities. The Sub-advisor utilizes a use-of-proceeds approach, in which each investment has a specific intention delivering positive environmental and/or social impact which must be measurable.
Risks To Consider
Market Risk: The market values of the portfolio’s holdings will fluctuate based on economic and market conditions.
Municipal Market Risk: Debt securities issued by state or local governments may be subject to special political, legal, economic and market factors that can have a significant effect on the portfolio’s yield or value.
Interest Rate Risk: As interest rates rise, bond prices fall and vice versa, long-term securities tend to rise and fall more than short-term securities.
Credit Risk: A bond’s credit rating reflects the issuer’s ability to make timely payments of interest or principal - the lower the rating, the higher the risk of default. If the issuer’s financial strength deteriorates, the issuer’s rating may be lowered and the bond’s value may decline.
Inflation Risk: Prices for goods and services tend to rise over time, which may erode the purchasing power of any income generated from these investments.
Derivatives Risk: Investing in derivative instruments such as options, futures, forwards or swaps can be riskier than traditional investments, and may be more volatile, especially in a down market.
Liquidity Risk: The difficulty of purchasing or selling a security at an advantageous time or price.
Local Economy Risk: This portfolio may contain municipal securities issued by the Commonwealth of Puerto Rico as well as other local governments whose current economic conditions could exacerbate the risks associated with investing in these securities.
ESG Risks: Applying ESG, impact and sustainability criteria to the investment process may exclude securities of certain issuers for nonfinancial reasons and, therefore, the Fund may forgo some market opportunities available to funds that do not use ESG, impact or sustainability criteria. The fund is only available in separately managed accounts or participants in “wrap fee” programs.
The minimum investment in the Ellevest Municipal Impact Portfolio is $250,000. In addition to Ellevest’s advisory fee, the client will pay 0.23% of assets managed to the Sub-adviser.
The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice.
The information provided does not take into account the specific objectives, financial situation or particular needs of any specific person.
Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
Investing entails risk including the possible loss of principal and there is no assurance that the investment will provide positive performance over any period of time.