First Trust Municipal High Income ETF (FMHI) seeks to provide high current income exempt from federal income taxes by investing in municipal bonds issued by state and local governments. The fund focuses on higher-yielding municipal debt securities across various credit qualities and maturities.
How It Works
FMHI employs an actively managed approach, selecting municipal bonds based on yield potential, credit analysis, and duration management. The portfolio managers evaluate bonds across the credit spectrum, including investment-grade and high-yield municipal securities. The fund maintains flexibility in duration positioning and can invest in various municipal bond types including general obligation bonds, revenue bonds, and private activity bonds. Holdings are typically concentrated in 50-150 positions with regular portfolio adjustments based on market conditions.
Key Features
- Actively managed municipal bond strategy targeting higher yields than typical investment-grade municipal bond ETFs
- Tax-exempt income at federal level with potential state tax benefits for residents of issuing states
- Flexible duration and credit quality approach allowing opportunistic positioning across municipal bond market segments
Risks
- This ETF can lose value when interest rates rise, as bond prices move inversely to rates, potentially causing 5-15% declines during rate hiking cycles
- Credit risk from municipal issuers facing financial stress could lead to defaults or downgrades, particularly impacting higher-yielding positions
- Tax law changes affecting municipal bond tax advantages could reduce demand and lower bond prices across the entire municipal market
Who Should Own This
Best suited for income-focused investors in higher tax brackets (28%+ federal rate) seeking tax-exempt income with 3-7 year time horizons. Medium risk tolerance required due to interest rate and credit sensitivity. Appropriate as 10-30% allocation within fixed income portion of diversified portfolios, particularly for investors in high-tax states.