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.

Revenue bonds

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.

Disclosures