For years, a “buy and hold” approach to individual municipal bonds served high-net-worth investors well. However, in today’s increasingly complex and volatile market, traditional retail bond buying faces significant headwinds.

While Separately Managed Accounts (SMAs) carry explicit advisory fees, their institutional pricing and active tax management provide value that may outweigh those costs. For investors prioritizing after-tax wealth, professional oversight has moved from a luxury to a strategic necessity.

What is a municipal SMA?

A Separately Managed Account (SMA) is a private portfolio of individual municipal bonds managed on your behalf by a professional investment firm. Unlike a bond mutual fund or ETF — where you own shares of a pool alongside thousands of other investors — in an SMA, you own the underlying bonds directly. This structure provides institutional-grade management while maintaining the transparency of individual ownership. Because the account is yours alone, the manager can customize the portfolio to your specific tax bracket, state of residence, and liquidity needs, providing a level of precision that a standard bond ladder cannot match.

1. The institutional execution advantage

The municipal market is fragmented and predominantly traded over-the-counter, often leading to high “markups” for retail investors.

• The transparency gap: Research from S&P Dow Jones Indices shows that retail municipal trades carry average implied costs of 0.72%, while institutional trades average just 0.17%.
• The fee offset: This 55-basis-point execution advantage can significantly offset an SMA’s management fee. While lower transaction costs do not guarantee higher returns, they reduce the “drag” created by retail mark-ups.

2. Seeking alpha through active management

Active managers exploit market inefficiencies to seek returns above passive benchmarks. According to AllianceBernstein, 87% of active municipal strategies outperformed passive benchmarks over rolling two-year periods, and 98% outperformed over rolling three-year periods.

Managers seek this “Active Edge” through:

• Yield-curve positioning: Managers shift maturities to capitalize on economic cycles. For instance, rather than a standard bond ladder, a common tactic is a barbell strategy—pairing short- and long-term bonds to maximize yield while staying flexible.
• Selective credit allocation: Portfolios may “tilt” toward A-rated or high-yield credit to boost income. This requires deep institutional research to identify value and avoid default risk.
• Sector rotation: Managers dynamically shift between specific sectors and structures based on after-tax relative value to exploit on market mispricings.

3. Precision tax-loss harvesting

Unlike static bond ladders, an SMA allows for proactive tax-loss harvesting. Managers can sell positions at a loss to offset capital gains elsewhere in your portfolio, then reinvest in similar securities to maintain your tax-free income stream.

The bottom line: Precision over passivity

In a municipal market defined by fragmentation and shifting tax legislation, the cost of “doing it yourself” is often higher than the fee of a professional manager. By capturing institutional pricing, surgically harvesting tax losses, and pivoting across the yield curve, an SMA transforms a static collection of bonds into a dynamic wealth preservation engine.

Don’t let your fixed-income strategy remain a relic of a simpler market — contact your Signet advisor to discuss if your portfolio is positioned to capture the institutional advantage that today’s volatility provides.

Important risk information

• Fees: SMAs incur management fees which will reduce net returns.
• Market and interest rate risk: Bond prices generally fall when interest rates rise.
• Active risk: There is no guarantee an active strategy will outperform a passive index or a simple ladder.
• Data sources: S&P Dow Jones Indices (IHS Markit) regarding execution costs; AllianceBernstein (2026) regarding rolling outperformance; S&P Dow Jones (Feb 2026) regarding barbell structures.

Note: These findings are based on historical cycles and illustrate potential benefits rather than guaranteed outcomes. This article is for informational purposes only and is not a recommendation to buy or sell any security.

IMPORTANT DISCLOSURE

The statements made in this newsletter are, to the best of our ability and knowledge, accurate as of the date they were originally made. But due to various factors, including changing market conditions and/or applicable laws, the content may in the future no longer be reflective of current opinions or positions.
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