What Midterm Elections Do

Midterm elections are increasingly taking over the headlines, and that includes coverage of markets. While inflation, rates, and geopolitics probably have more outright impact on portfolios, investors and market watchers still look to midterm elections as a major event. While big agenda shifts have more obvious impacts for stocks, the implications for bonds may be particularly important, as yields are shifting rapidly. Key Takeaways: - Midterm elections are a frequent topic not only of headlines, but investor thoughts. - Research shows mixed and somewhat limited impact for said elections on bonds. - That said, active bond ETFs can help exploit the shifts that elections do create. Those impacts don’t have to be exclusively good or bad. There are implications for particular subcategories of bonds. For muni bonds, there are Federal, state, and local implications. Localities elect leaders who may issue more bonds, state level elections impact local control and budgets, and Federal elections, of course, set national tax and policy. According to analysis from American Century Investments, elections have good and bad impacts on munis. Yields are mixed over the 11 elections since 1982. The average impact came in at 0.32 percentage points, according to that analysis. State elections have potentially a bigger role, with the muni market expecting more than $75 billion in bond authorizations with the election. What about other bond types? Uncertainty tends to dissipate after big elections like U.S. midterms. That doesn’t just benefit government bonds, decreasing yield pressure. Corporate bonds also benefit from a clearer set of signals and policies from the government. Per research from Lombard Odier, post-election periods can produce constructive rallies for Treasuries and for high quality bonds. While a divided government has its issues, it can reassure corporates that policy is not likely to significantly change. Writ large, however, there are opportunities in bonds right at or after midterm elections. ETFs That Can Appeal in Midterm Elections What kind of ETFs can help navigate the impact of elections on bonds? Active bond ETFs can provide a key solution or set of solutions. In the muni bond space, active funds like the Franklin Dynamic Municipal Bond ETF (FLMI) and the American Century Diversified Municipal Bond ETF (TAXF) can appeal. See more: How to Prepare for Decumulation in Retirement They have returned 4.4% and 2.9% over the last three years per ETF Database data, respectively. The duo have offered tax exempt assets to reduce overall bills and fundamentals-driven, active strategies through their periods of operation. Together, they represent the kind of active ETFs that can help navigate events-based volatility and look for long term value for investors and advisors. For more news, information, and strategy, visit the Fixed Income Content Hub.