Seeking stability amid uncertainty: the appeal of tax-aware ETFs

In the trade shock felt around the world, President Trump’s Liberation Day-inspired tariffs rocked the financial markets, seemingly affecting every sector – even the characteristically less risky ones.¹

Investors held their collective breath as the 10-year Treasury’s yield, which fell 14 basis points² in one day, spiked 42 basis points over the next five days in mid-April, challenging its reputation as a safe haven asset. For the year up to May 31, the 20-year US Treasury Index has swung between negative to positive performance five times.³ Over the following weeks, the markets quickly retraced their steps, leaving investors to question, “Did that really happen?” 

Similar to prior market shocks like the Great Financial Crisis and COVID, ETFs served as a valuable tool for investors to express their real-time views across markets. Since they trade on public exchanges, ETFs offer intraday liquidity and allow investors to respond promptly to market shifts. They also typically have lower expense ratios than mutual funds and can help enhance portfolio diversification.

ETFs’ most defining feature may be their reputation for tax efficiency, especially compared to mutual funds. ETFs tend to disperse fewer capital gains due to generally lower turnover and their structure, which insulates ETF shareholders from the actions of other investors.

As investors sought stability and income amid the market uncertainty, they increasingly turned to fixed income ETFs, which have garnered $156 billion in inflows year to date as of May 31.⁴ Investors’ continued search for innovative ways to seek to maximize income, particularly on an after-tax basis, has driven the appeal of tax-aware strategies within the fixed income ETF universe.

For decades, municipal bonds had been the primary approach for investors looking for tax-exempt income. What’s been overlooked is that depending on relative value, sometimes paying taxes on income derived from corporate or securitized bonds may result in higher after-tax returns than those from municipal bonds alone.

That’s where tax-aware ETFs come in. Unlike traditional municipal bond funds, which focus exclusively on tax-exempt income, tax-aware ETFs aim to expose investors to a broader opportunity set across municipal and taxable bonds, like corporates and securitized. For example, TAXX, the BondBloxx IR+M Tax-Aware Short Duration ETF, is an active ETF that employs rigorous bottom-up security selection in an attempt to determine the ideal blend of tax-exempt and taxable bonds based on market conditions. 

While the municipal market was not immune to April’s intra-month volatility, tax-aware ETF investors may have benefitted from the rise – and subsequent fall – of the sector’s yield. During a month that posted positive returns just four times in the last ten years, the municipal market was pressured by record-setting supply, tax-day payments, and tariff-fueled uncertainty.

Against this backdrop, municipal bonds underperformed Treasuries, resulting in the highest muni/Treasury ratio since 2022 and a much welcomed, more attractive entry point for investors. The muni/Treasury ratio compares the yields of municipal bonds to U.S. Treasuries, typically before considering taxes. By comparing the ratio to its historical average, investors can determine whether municipal bonds are attractive relative to Treasuries. 

Tax-aware ETFs aim to deftly navigate, and capitalize on, this ever-changing tax-exempt vs. taxable relationship. In an environment characterized by uncertainty, ETFs – especially the tax-aware variety – are a compelling tool for those seeking after-tax income and stability.
 

Erinn King is chief strategy officer and co-head of client team at Income Research + Management, a privately owned, independent, fixed income investment management firm that serves institutional and private clients. 

[1] Source: Bloomberg, as of April 2025

[2] A basis point is a unit of measure equal to 1/100th of 1 percent (0.01%). It's used to express changes in yields and other percentages.

[3] Source: Bloomberg, based on the Bloomberg U.S. Treasury Twenty Year Duration Index, as of May 31, 2025.  The Bloomberg U.S. Treasury Twenty Year Duration Index is designed to target a 20 Year duration using US Treasury securities.

[4] Source: Morningstar, as of May 31, 2025

Source: Bloomberg. As of 5/31/25. The views contained in this report are those of IR+M and are based on information obtained by IR+M from sources that are believed to be reliable, but IR+M makes no guarantee as to the accuracy or completeness of the underlying third-party data used to form IR+M’s views and opinions. This report is for informational purposes only and is not intended to provide specific advice, recommendations, or projected returns for any particular IR+M product. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from IR+M. “Bloomberg®” and Bloomberg Indices are service marks of Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (“BISL”), the administrator of the index (collectively, “Bloomberg”) and have been licensed for use for certain purposes by IR+M. Bloomberg is not affiliated with IR+M, and Bloomberg does not approve, endorse, review, or recommend the products described herein. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to any IR+M product. Investors should consider the investment objectives, risks, charges and expenses carefully before investing. For a prospectus or summary prospectus with this and other information about the fund, please call 800-896-5089 or visit our website Home - BondBloxx® ETF. The funds are distributed by Foreside Fund Services, LLC.

There are risks associated with investing, including possible loss of principal. Fixed income investments are subject to interest rate risk; their value will normally decline as interest rates rise. Fixed income investments are also subject to credit risk, the risk that the issuer of a bond will fail to pay interest and principal in a timely manner, or that negative perceptions of the issuer's ability to make such payments will cause the price of that bond to decline.

The Fund is an actively managed exchange-traded fund (“ETF”) that does not seek to replicate the performance of a specified index. The Fund is newly organized and seeks to achieve its investment objective by investing in a diversified portfolio of U.S. dollar denominated municipal and taxable short duration fixed income securities. The Fund invests, under normal circumstances, at least 50% of its total assets in municipal securities that pay interest that is exempt from U.S. federal income tax. These securities may pay interest that is subject to the U.S. federal alternative minimum tax and state and local income tax for certain taxpayers. The income earned and distributed to shareholders on taxable securities would not be exempt from U.S. federal, state or local income tax. The Sub-Adviser selects securities for the Fund based on a variety of factors, including credit quality, maturity, diversification benefits, and the relative expected after-tax returns of taxable and municipal securities (considering federal tax rates and without regard to state and local income taxes). Consistent with the Fund’s investment objective, the Fund could continue to hold a security even if the interest on that security changes from being tax-exempt to taxable. The fund is new with a limited operating history.

Municipal securities risks include the possibility that the issuer may be unable to pay interest or repay principal on a timely basis or at all, the relative lack of information about certain issuers of municipal securities, and the possibility of future legislative changes which could affect the market for and value of municipal securities.

Debt issuers and other counterparties may be unable or unwilling to make timely interest and/or principal payments when due or otherwise honor their obligations. Changes in an issuer’s credit rating or the market’s perception of an issuer’s creditworthiness may also adversely affect the value of the Fund’s investment in that issuer. The degree of credit risk depends on an issuer’s or counterparty’s financial condition and on the terms of an obligation.

The U.S. Government and the U.S. Congress consider changes in U.S. federal tax law that could limit or eliminate the U.S. federal income tax exemption for municipal bond income, which would in effect reduce the after-tax returns received by shareholders from the Fund by increasing taxes on distributions from the Fund.

Duration is a measure of the expected life of a fixed-income security that is used to determine the sensitivity of a security’s price to changes in interest rates.

Tax aware risk is the possibility that the use of investment practices that seek to minimize tax consequences will lead to investment decisions that do not maximize the returns on an after-tax basis. Economic

developments or unforeseeable investor redemptions may also reduce returns without any corresponding increase in tax efficiency.

Certain information contained herein has been obtained from third party sources and such information has not been independently verified by BondBloxx. No representation, warranty, or undertaking, expressed or implied, is given to the accuracy or completeness of such information by BondBloxx or any other person. While such sources are believed to be reliable, BondBloxx does not assume any responsibility for the accuracy or completeness of such information. BondBloxx does not undertake any obligation to update the information contained herein as of any future date.

Except where otherwise indicated, the information contained in this presentation is based on matters as they exist as of the date of preparation of such material and not as of the date of distribution or any future date. Recipients should not rely on this material in making any future investment decision.

Any indices and other financial benchmarks shown are provided for illustrative purposes only, are unmanaged, reflect reinvestment of income and dividends and do not reflect the impact of advisory fees. Investors cannot invest directly in an index. Comparisons to indexes have limitations because indexes have volatility and other material characteristics that may differ from a particular hedge fund. For example, a hedge fund may typically hold substantially fewer securities than are contained in an index.

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