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Damn the Torpedoes, Full Speed Ahead

• After the May inflation survey showed a reversal and unexpected acceleration in the inflation data, the Federal Reserve (the “Fed”) hiked short term rates 75 bps, the largest such move since 1994.

• The fixed income markets are adjusting to the Fed’s statements that hikes will continue until “there is clear and convincing evidence inflation pressures are abating”.1

• For fixed income, the rough seas may not be over as this uncertain economic cycle plays out, particularly because the Fed’s credibility is on the line to manage inflation expectations even as recessionary clouds may be forming.

• However we do not think fixed income investors should panic, and continue to feel investors can benefit from active fixed income management together with high quality ballast such as municipal bonds.

Oh Captain! My Captain!

The markets continue to position and adjust to the Federal Reserve chairman Jerome Powell’s recent statements such a saying getting inflation under control will “cause some pain” and that the Fed “can’t guarantee a soft landing”.2 Time will tell whether the Fed’s rate hike cure for inflation will be worse for fixed income investors than its symptoms, but mind you this is the same Fed that kept short rates at zero and continued to buy bonds well after inflation took off at a rate double its stated target over a year ago. This is the same Fed chair that has reversed its rate and balance sheet policies three times in less than four years. Now we are coming off a negative real gross domestic product (GDP) print and a yield curve flirting with an inversion, which could suggest that aggressive hiking into a recession may be yet another late reaction to a problem the Fed admittedly can’t control on its own. Oh, and the Fed is slated to begin its quantitative tightening (QT) after it hikes rates in mid-June. The last time QT was initiated it had to be aborted less than a year later due to similar yield curve signals. This time the hiking cycle has begun during a negative real GDP quarter, which adds an element of caution to the credit cycle.

Build a Port in the Storm

It is easy to forget that rising short term rates often set the stage for positive fixed income returns throughout the full hiking cycle. With yields rising, the market is allowing for potentially higher income opportunities and an opportunity to upgrade your ship’s ballast. Adding actively managed municipal bonds may be one way to do that, and enjoy a stream of federally tax free income in the process.

Muni bonds may provide several unique potential advantages which may serve as a cornerstone holding. These include:

  • Federal tax free income3
  • Lower volatility than both corporate bonds and treasuries
  • Low correlations vs. equities and treasuries, and to a lesser degree, corporate bonds
  • Some potential inflation protection for credit via tax revenues (sales and real estate taxes)

20220621-chartWe believe active management of fixed income is critical, to not only protect investors capital, but to have flexibility to react to incoming data. The incoming data will dictate the ultimate path of how high the Fed will need to hike to achieve its goals, not the market’s current estimate of it.

For these reasons it makes sense to strengthen your portfolio ballast and consider the benefits actively managed municipal bonds offer as this cycle unfolds.

Important Disclosures & Definitions

1 US News, May 4, 2022, https://www.usnews.com/news/business/articles/2022-05-17/powell-fed-to-keep-hiking-rates-until-it-controls-inflation

2 CNBC, May 4, 2022, https://www.cnbc.com/2022/05/12/powell-says-he-cant-guarantee-a-soft-landing-as-the-fed-looks-to-control-inflation.html

3 This notice is provided for informational purposes only, and should not be considered tax advice. Please consult your tax advisor for further assistance.

Bloomberg Municipal Bond 1-15 Year Blend Index: an unmanaged index comprised of fixed-rate, investment-grade tax-exempt bonds with remaining maturities between 1 and 17 years. One may not invest directly in an index.

Bloomberg US Aggregate Bond Index: a broad-based benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, fixed-rate agency MBS, ABS and CMBS (agency and non-agency). The Index changed its name from the Bloomberg Barclays US Aggregate Bond Index to the Bloomberg US Aggregate Bond Index on 08/24/2021. One may not invest directly in an index.

Bloomberg US Corporate Bond Index: measures the investment grade, fixed-rate, taxable corporate bond market. One may not invest directly in an index.

Bloomberg US Treasury Index: measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury. One may not invest directly in an index.

Bond Rating: a letter-based credit scoring scheme used to judge the quality and creditworthiness of a bond. Investment grade bonds are assigned “AAA” to “BBB-“ ratings from Standard & Poor's, and Aaa to Baa3 ratings from Moody’s. Junk bonds have lower ratings. The higher a bond's rating, the lower the interest rate it will carry, all else equal.

Municipal Bond: a debt security issued by a state, municipality, or county to finance its capital expenditures, including the construction of highways, bridges, or schools. They can be thought of as loans that investors make to local governments.

Real Gross Domestic Product (Real GDP): an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year.

Standard Deviation: a statistical measure that indicates the extent of deviation for a group as a whole.

An investor should consider the investment objectives, risks, charges and expenses carefully before investing. To obtain a prospectus containing this and other information, call 1-866-759-5679 or visit www.alpsfunds.com. Read the prospectus carefully before investing.

Shares are not individually redeemable. Investors buy and sell shares on a secondary market. Only market makers or “authorized participants” may trade directly with the Fund, typically in blocks of 5,000, 25,000 or 50,000 shares.

Performance data quoted represents past performance. Past performance is no guarantee of future results; current performance may be higher or lower than performance quoted.

All investments are subject to risks, including the loss of money and the possible loss of the entire principal amount invested. Additional information regarding the risks of this investment is available in the prospectus.

The Fund is new and has limited operating history.

The Fund invests principally in municipal securities. The value of municipal securities may be affected by uncertainties in the municipal market related to legislation or litigation involving the taxation of municipal securities or the rights of municipal securities holders in the event of a default or bankruptcy. If a security’s structure fails to function as intended, the security could become taxable or decline in value. Additionally, issuers of municipal obligations may not be able to make timely payments because of general economic downturns or increased governmental costs.

The Fund will not invest 25% or more of its total assets in any one municipal revenue sector relating to bonds backed by revenues from similar types of projects (such as those relating to higher education, healthcare, housing, airports or utilities) or with other similar economic, business, or political characteristics. However, as the Fund’s exposure to such similar projects increases, the Fund will also become more sensitive to adverse economic, business or political developments relevant to these projects.

Brown Brothers Harriman & Co. (BBH) considers environmental, social and governance (ESG) factors for each investment in the portfolio. ESG factors include, but are not limited to, the environmental and social impact of the issuer, as well as the issuer’s instituted governance programs. A less favorable ESG profile may not preclude the Fund from investing in a bond of an obligor, as the consideration of ESG factors may not be more influential than the consideration of other investment criteria.

ALPS Advisors, Inc. is the investment adviser to the Fund and Brown Brothers Harriman & Co. is the investment sub-adviser to the Fund. ALPS Advisors, Inc. and ALPS Portfolio Solutions Distributor, Inc., affiliated entities, are unaffiliated with Brown Brothers Harriman & Co.

ALPS Portfolio Solutions Distributor, Inc. is the distributor for the Fund.

ALPS Portfolio Solutions Distributor, Inc., FINRA Member.

Not FDIC Insured • No Bank Guarantee • May Lose Value

AIM000111 07/31/2023

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