Avantis Core Municipal Fixed Income ETF (AVMU)

AVMU (Avantis Core Municipal Fixed Income ETF) is a fund that invests in municipal bonds — debt securities issued by U.S. states, cities, and other local authorities to finance public infrastructure, schools, and services. The fund is sponsored by American Century Investments and listed on the NASDAQ under ticker AVMU. For U.S. residents in higher tax brackets, municipal bonds are attractive because the interest income they generate is exempt from federal income tax and, in many cases, from state and local tax as well.

The muni bond market and why it matters

The municipal bond market is enormous and sprawling — tens of thousands of distinct issues outstanding at any moment, ranging from tiny local-government bonds to major infrastructure financings. A typical municipal bond finances a specific project or refunds an earlier issue. The issuer is a state, county, city, school district, or special-purpose authority. In the United States, interest paid on most municipal bonds is exempt from federal income tax, and many are also exempt from the issuer’s home state taxes. This tax advantage is the defining feature of the asset class and makes munis attractive to investors in high tax brackets.

Because the income is tax-free, municipal bonds typically offer lower yields than comparable corporate bonds of the same credit quality. An investor must do the math: a municipal bond yielding 3 percent is often worth more to a high-income earner than a taxable bond yielding 4 percent, because the tax-free income avoids the federal tax bite. For lower-income investors or tax-exempt entities like foundations, taxable bonds are often a better deal.

Fund structure and holdings

AVMU tracks the Avantis Core Municipal Bond Index, a broad, diversified index of investment-grade municipal bonds. Investment-grade means the bonds have a credit rating of BBB minus or higher (using the Standard & Poor’s scale), indicating a low probability of default. The fund is not a closed-end fund with a fixed maturity date; it is an open-ended ETF that can grow and shrink with investor demand.

The holdings in a municipal-bond fund are hundreds of individual bonds, each issued by a different municipality or authority. The fund may hold bonds from school districts in California, utilities in Texas, transportation authorities in the Northeast, and so on. This diversification across regions and issuers is crucial: it protects the fund from the default of any single municipality. Even though municipal defaults are rare, they happen — Puerto Rico’s debt crisis in the 2010s, pension crises in some cities — so geographic and sector diversification matter.

The bonds in the index typically range from relatively short-maturity (a few years) to longer-maturity (20 or 30 years). The index methodology aims to capture a representative slice of the investment-grade muni market, weighted by the size and float (amount outstanding) of each issue. As individual bonds mature, they roll off the portfolio; as new munis are issued and enter the index, the fund adds them. This gradual turnover is one reason the fund’s costs are reasonable.

Tax-exempt income and yields

The primary appeal of AVMU is tax-exempt income. An investor who holds the fund in a taxable account receives distributions (usually monthly or quarterly) that are not subject to federal income tax. Depending on where the bonds are issued and where the investor lives, many distributions are also state-tax-free. For a high-income earner in a high-tax state like California or New York, the after-tax yield can be very attractive.

However, the trade-off is lower nominal yield. Because of the tax advantage, municipal bonds trade at lower yields than corporate bonds of equivalent credit quality. Additionally, bond prices move inversely to interest rates: when rates rise, bond prices fall, and vice versa. An investor who buys AVMU and must sell before the bonds mature may realize a loss if rates have risen in the interim. This interest-rate risk is built into any bond fund.

Costs and credit quality

AVMU has a modest expense ratio appropriate for a passive, index-tracking fund, as it does not employ active managers making security selections. The fund trades on the NASDAQ, so it can be bought and sold at market prices throughout the day.

The core index is investment-grade, meaning most bonds carry ratings of BBB minus or higher. The fund may hold a small percentage of lower-rated bonds (including some non-rated bonds from small issuers), but the median credit quality remains solid. The fund does not hold bonds that are in default or at high risk of default.

Who holds AVMU and what to watch

AVMU is primarily held by investors seeking municipal-bond exposure in a tax-efficient, diversified format. High-net-worth individuals, particularly those in high federal and state tax brackets, are natural buyers. Some advisors recommend a sleeve of municipal bonds for clients who are in or approaching high-income years or who live in high-tax states.

For someone researching the fund, the key facts are the yield (which varies with market conditions and can be found on American Century’s fact sheet), the average maturity, the average credit quality, and the expense ratio. The prospectus details the index methodology and lists the fund’s largest holdings. Since municipal bonds carry credit risk (though usually low for investment-grade issues), an investor should understand the fund’s exposure to bonds from troubled municipalities or highly leveraged local authorities.

When interest rates move, AVMU’s share price will fluctuate — rising when rates fall, falling when rates rise. An investor planning to hold the fund until maturity of the underlying bonds does not need to worry about price swings; an investor who may need to sell before maturity should be aware of this interest-rate sensitivity.