Sterling Capital National Municipal Bond ETF (SCNM)
The Sterling Capital National Municipal Bond ETF trades as SCNM and pools investor capital into a diversified portfolio of municipal bonds — debt issued by states, cities, and local agencies — that pay interest exempt from federal income tax.
The tax play
Municipal bonds exist for one reason: to subsidise state and local borrowing by offering investors a tax deal. A muni bond paying 4% interest is economically closer to a taxable bond paying 6% if the investor sits in a 40% combined federal and state tax bracket. That math is why SCNM exists. The fund is a delivery mechanism for that tax shelter — useful only for investors in high tax brackets who would otherwise pay significant federal tax on ordinary bond interest.
Lower-income investors and tax-deferred accounts like IRAs should avoid SCNM. The tax exemption is worthless to them, and they would be better served by a fund holding higher-yielding taxable bonds. The fund is essentially a product designed for a specific clientele: investors whose income or deferred gains push them into a situation where avoiding federal tax is genuinely valuable.
What bonds does the fund hold, and how does active management matter?
SCNM holds a nationally diversified mix of municipal bonds issued by cities, counties, states, and public authorities across the United States. The bonds finance schools, roads, water systems, airports, and debt refinancing. They are typically issued with maturities ranging from 3 to 20+ years.
The manager’s job is to navigate the credit quality of individual issuing agencies. Some municipalities carry strong finances and minimal default risk; others carry contingent liabilities or demographic headwinds that erode their credit. An index would treat all investment-grade munis equally. SCNM’s manager can overweight the creditworthy ones and underweight — or avoid — those showing stress. This is where active management in the municipal bond market can add real value. Unlike stocks, where hundreds of analysts and millions of retail traders watch each name, municipal bonds are lightly covered and often mispriced, leaving room for a dedicated manager to spot value and risk.
The manager also makes duration and yield-curve decisions — deciding whether the fund is better positioned with shorter-maturity bonds or longer, and with higher-yielding lower-grade munis versus safer premium-rated ones. These are tactical calls that change the fund’s interest-rate risk and credit risk.
The cost trade-off
SCNM charges an annual expense ratio reflecting active management, typically in the 0.40% to 0.70% range. That fee compounds: a 0.60% fee on a fund earning a 3% yield eats 20% of the return. Sterling Capital’s justification is that the manager’s bond-picking and credit analysis add more than 0.60% of value through better selection, timing, and risk management. That is an empirical claim worth checking against the fund’s track record.
Passive municipal bond funds exist and charge far less — sometimes 0.05% or below. SCNM’s argument is that municipal bonds are inefficient enough that active management can beat those passive alternatives after fees. Some investors will agree; some will not.
Interest-rate and credit risks
When federal interest rates rise, the prices of existing bonds fall — this is true of munis as much as Treasuries. If an investor buys SCNM and holds it to maturity, the principal return is certain (assuming no default). But if the investor needs to sell before maturity, a rise in rates has eroded the value. The longer the bonds’ average maturity, the bigger the price swing.
Credit risk — the possibility that a municipal issuer fails to pay — is present but concentrated. SCNM holds investment-grade bonds, meaning the major ratings agencies rate them as having low default probability. But credit conditions can deteriorate. A city facing fiscal collapse, pension underfunding, or economic distress may eventually default on its bonds. Diversification across states, municipalities, and issuers reduces this risk but does not eliminate it. The fund can still suffer real losses if a large or unexpected default occurs.
There is also reinvestment risk: if the fund holds a bond that matures when interest rates are lower, the reinvested proceeds earn less. This is not unique to SCNM but is a structural feature of any bond strategy.
Who should own this fund?
SCNM is for investors in marginal federal tax brackets of 32% and higher — broadly, investors earning well above the national median or with large deferred gains they are realizing. For them, the tax exemption is real and valuable, and an actively managed municipal fund may be worth its fee.
Investors in lower tax brackets, retirees in very low-income years, and anyone holding this inside a Roth IRA or similar tax-deferred account should instead own taxable bond funds, which offer higher yields.
Non-US investors and investors who live in low-tax states (with no state income tax) benefit less from the exemption and should reconsider.
How to evaluate the fund
Obtain the prospectus and fact sheet from Sterling Capital or through any financial platform. Review the fund’s 3-year, 5-year, and since-inception total return against a simple benchmark: the Bloomberg Municipal Bond Index or a comparable passive muni fund. If SCNM is ahead after fees, the manager is earning their keep. If it is behind, the fees are a drag.
Examine the top holdings and the fund’s credit quality breakdown. What percentage is in AAA, AA, A, and BBB (or unrated equivalent) bonds? The higher the concentration in lower-rated munis, the higher the credit risk — sometimes justifiably, if the yield compensates, but worth understanding.
Check the fund’s average maturity and duration. This tells you how sensitive the fund is to interest-rate moves. A fund with 10-year duration loses about 10% if rates rise 1% — useful to know if your outlook on interest rates differs from the manager’s bet.
Finally, stay alert to changes in the fund’s manager, investment team, or mandate. Active management is only as good as the people running it, and turnover in key staff can meaningfully change performance.