Muni ETF Growth from Active: Eric Kazatsky

Bloomberg

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00:00We talk about single stock ETFs all the time. It's kind of fun to talk about single state

00:04ETFs. And just walk us through why California? I have to imagine it has to do with the very

00:10high tax rates. But why focus on this state in particular? Well, you hit the nail on the head,

00:15right? You're a top tax earner in California. You're paying 13.3% to the state on top of the

00:20almost 40% you're paying to the federal government, right? So you're looking for any

00:24ancillary tax savings you can get. And we're filling a need there. So let's look at some

00:29of the bonds in here. I mean, it's kind of like Chinese to me, to be honest. You're the expert

00:33here. What are you looking for when you buy a bond? Obviously, there's duration, credit,

00:38or just the on-the-ground information about how good the deal is and what it represents.

00:45What do you got? It's going to be all that, right? We're trying to match a benchmark and beat that

00:49benchmark, right? So there's going to be a couple of different levers you can pull, right? You're

00:52going to play with duration and you're going to play with better credit selection. And I think

00:55just compared to the competitors you pointed out when you were drilling down, right, it's

00:59really just sort of accessing that 25% of the market that our competitors really aren't playing

01:03in. That's really led to the returns. And let's zoom out and talk about Muni ETFs overall,

01:07because it's the first trading day of December. And we've been talking about the triple crown

01:12that we're seeing for the industry overall, but it's been quite a year for Muni ETFs as well.

01:17When you just think about the growth rate, what is driving that? You know what? A lot of that

01:22growth has come in the active side. And to me, that's the pendulum is swinging and people care

01:27about total return again. So as active managers, that's super exciting. But again, it really goes

01:32back to taxes and people hate taxes. He hates taxes, I know. So it's really, again, filling

01:38that need and sort of checking off a box, but also giving people something tangible. They can point to

01:42a school, they can point to a hospital. So it's something they're familiar with.

01:45An advisor once told me that their clients hate taxes more than they like getting returns.

01:49Like it's, it's actually more important to some people.

01:52Feeding taxes is more satisfying.

01:54Anyway, back to active. We showed how bond mutual funds, especially active ones have like survived

02:00this sort of like passive massacre that equity is feeling. And if you look at the active versus

02:05index reports from S&P, Munis are like through the roof. I think 70 to 80% of active Muni managers

02:11beat their benchmark versus 30 for stocks. Why?

02:13It really comes down to the diversity of credit available in municipals. So you're talking 900,000

02:19QSIPs, 50,000 different issuers, right? It gives you a lot of room in the sandbox to play in. And I

02:25feel like that's where a lot of the active management can really sort of make the differential for

02:29clients. Going back to the idea of state focused funds, you know, we talk about California all the

02:33time. There's a lot of New York focused Muni funds out there as well. Are we going to see that

02:38expand to other states or is it really just those big two that people care about?

02:42There are other single state mandates, obviously, because the taxes aren't high in other states.

02:46They're not as attractive. But look, if you're a New York investor, there are New York specific

02:51funds, but you could even buy the Cal fund and pick up five and a half percent on an after tax

02:55basis, right? Still attractive no matter if you live in California or not.

02:59Okay. I've always wondered this about the Muni category. How come an issuer hasn't come out

03:03with the name of the things they buy? For example, the schools and hospitals Muni ETF,

03:10because who doesn't like schools and hospitals, Katie? I always thought this would be a more

03:14natural way to be ESG. Yeah, but I haven't seen it. It's always like intermediate tag. It's just

03:19why don't they just talk about what it does? I think it comes down to diversity in portfolios. Look,

03:25I totally get it, right? Schools. It's so easy. What a sale, right? I just invest in schools,

03:29but you're not getting the diversity that people really are seeking in the municipal market.

03:33They want a broad basket of everything that really is sort of, you know, makes up the market.

03:38And what do you guys have planned next? I know you have rolled out a few products,

03:42but you're not, you don't, you don't like flood the market with products. What do you got planned

03:46next? I think the next thing in line is really an allocation ETF playing in that basket of high

03:50yield and IG credit and really sort of leaning into our strengths is better credit selectors.

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