Fixed Income Why own munis in a separately managed account?

Higher yields have made tax-exempt income attractive again, and with the top 37% federal income tax bracket made permanent in the 2025 tax law, the case for focusing on tax-equivalent yields remains compelling for high earners.

Deciding whether to own municipal bonds is only part of the story. How you own them can matter just as much. Mutual funds and ETFs provide efficient access to the muni market, but they give investors control over when and how taxes are realized. A separately managed account (SMA) addresses that limitation by holding individual municipal bonds directly in the investor’s name within a professionally managed portfolio that’s tailored to the investor’s situation.

Why an SMA can be more tax-efficient

Direct ownership of securities through an SMA allows the investment manager to take actions that may be difficult or impractical in a mutual fund or ETF. One of the most valuable is tax-loss harvesting.

When a muni bond falls below its purchase price, which can happen during periods of interest-rate volatility, the SMA manager can sell it to realize a loss. The proceeds can then be reinvested in a similar bond to maintain the portfolio’s intended exposure and duration. The realized loss may be used to offset gains elsewhere in the investor’s portfolio.

Because an SMA is managed at the individual-account level, tax-loss harvesting can take place throughout the year and reflect the investor’s specific circumstances. In a fund, tax decisions are made for the pool as a whole.

The portfolio can also concentrate in bonds issued in the investor’s home state to pursue both federal and state tax exemptions. It can exclude bonds subject to the alternative minimum tax (AMT) or target a particular duration, credit-quality range, and liquidity profile. Existing holdings can be incorporated and transitioned gradually with an eye on any tax consequences.

Combined, these capabilities can create tax alpha, the added after-tax return that comes from managing taxes as an active decision rather than a year-end event.

Invesco’s approach to muni bond SMAs

Invesco builds fixed income SMAs around each client’s duration target, tax circumstances, liquidity needs, and investment preferences.

Our tax-free SMAs invest in tax-exempt municipal bonds and are designed for clients in higher tax brackets. We offer state-specific options and strategies with maturities spanning ultra-short through intermediate. For investors who can benefit from taxable fixed income, our tax-aware SMAs combine a municipal bond core with corporate and government bonds, and the allocation can shift as relative value changes on an after-tax basis.

Drawing on our more than 30 years of experience managing SMAs, these strategies use continuous, technology-enabled tax management and daily portfolio visibility and support tax-loss harvesting and customization at scale. Efficiencies in account setup and pricing have also made SMAs more accessible than they once were, extending their reach beyond the largest portfolios.

For financial professionals seeking to deliver tax-exempt income with greater control, learn how our municipal bond SMAs can turn a static allocation into an actively managed source of after-tax value.