On July 10, 2024 – T. Rowe Price launched T. Rowe Price Intermediate Municipal Income ETF (TAXE), an actively managed ETF. Price has 16 other ETFs, including semi-transparent and transparent equity and income funds but this is the first that does not directly mirror an existing fund.
The fund is co-managed by James Lynch and Charlie Hill, who collectively have 53 years of investment experience, and have served in portfolio management roles for other T. Rowe Price intermediate-term municipal bond strategies. Mr. Hill had managed the three-star $5.4 billion T. Rowe Price Summit Municipal Intermediate Fund (PRSMX) since 1993. Morningstar celebrates its “standout team and compelling and repeatable process [which] make it a strong pick.” Mr. Lynch was named a co-manager of the fund in June 2024.
What the fund does: The fund seeks the highest level of income exempt from federal income taxes consistent with moderate price fluctuation. The plan is to invest primarily in investment-grade municipal securities rated in one of the four highest rating categories assigned by a major credit rating agency. That said, they reserve the right to buy high-yield bonds. In general, the weighted average effective maturity will be four to twelve years.
Why it might: The Wall Street Journal offers this teaser for the asset class: “Want to get a tax-free return on your money? Put sewers and subway systems in your portfolio. The municipal bonds that state and local governments sell to pay for unsexy-sounding infrastructure projects are offering their highest yields in more than a decade” (“Earn 4.5% With No Taxes? How to Invest in Municipal Bonds,” WSJ.com, 10/19/2023). Some argue that muni bonds are systemically underpriced because few investors understand that 3.5% tax-free can be a lot better than 4.5% taxable.
Three reasons to consider this ETF, each related to Summit Municipal Intermediate. First, the Summit fund does a useful thing in a quintessentially T. Rowe Price way. Over the course of the 21st century, the fund has delivered marginally above-average returns with consistently below-average volatility. Morningstar notes, “The team has a track record of navigating a variety of markets well. The fund’s shorter duration and strong security selection helped it beat more than two-thirds of rivals in mid-2013 when muni yields spiked. The same helped cushion the blow in 2020’s market selloff.” Measured by the Sharpe ratio, it’s a top-five choice over the past 25 years. Second, the Summit Fund has a $25,000 minimum initial investment. The ETF weighs in at $1. Third, the Summit Fund charges 0.51%. The ETF is less than half of that, at 0.24%. That puts it in the cheapest 20% of all funds and ETFs in its peer group.
Price is very clear that the ETF is not a clone of the fund: “This ETF is a new strategy, the first of the firm’s fixed income active ETFs that is distinct from existing T. Rowe Price mutual funds.” That said, the team is the same and the words used to describe the investment strategy are the same.
I wouldn’t expect magic. Muni managers can add a little bit to total returns, but not much. Over the past 25 years, the intermediate municipal group has returned 3.5% annually, and 28 of the existing 30 funds fell within 0.3% of that average. One high-vol fund made much more than the group, one low-vol fund made much less, and everyone else clustered.
The administrative details: the ETF charges 0.24% on assets of $50 million. T. Rowe Price Intermediate Municipal Income ETF homepage.
