The California Investor's Steady Anchor: NYLI MacKay Muni Fund in Rising Rates

In an era of rising interest rates and volatile markets, California-based investors seeking tax-efficient income face a critical challenge: balancing yield with stability. Enter the NYLI MacKay California Muni Fund (MMCA/MCOIX), an actively managed ETF and mutual fund designed to navigate these headwinds. With its intermediate duration strategy, focus on high-quality issuers, and a tenured team's disciplined approach, MMCA stands out as a defensive cornerstone for portfolios. Here's why it deserves a closer look—and how it contrasts with peers faltering under market pressures.

Active Management: A Shield Against Market Whiplash

At the heart of MMCA's appeal is its active management approach, led by a team with decades of experience in municipal bonds. Unlike passive ETFs tied to broad indices, MMCA employs a relative value strategy that dynamically adjusts exposure to sectors, issuers, and maturities. This allows the fund to avoid overexposure to riskier segments of the market, such as lower-rated BBB issuers or long-duration bonds.

The team's focus on credit analysis and sector rotation ensures MMCA prioritizes issuers with strong balance sheets, such as California's well-funded universities, hospitals, and infrastructure projects. This contrasts sharply with peers like the NYLI MacKay Utah Muni Fund (MMD), which, while similarly stable, lacks California's unique tax advantages for local investors. Meanwhile, ETFs like MUB (iShares National Muni Bond ETF), which holds a broader mix of issuers, face wider discounts due to their reliance on lower-quality credits.

Risk Controls: No Leverage, No Interest Rate Bets

MMCA's defensive edge stems from its strict risk discipline:
- No leverage: Unlike some peers that amplify returns via borrowed capital, MMCA avoids compounding volatility.
- Intermediate duration (3–8 years): This range allows the fund to minimize exposure to rising rates while maintaining income generation.
- Focus on high-quality issuers: Over 80% of its holdings are rated A or higher, shielding it from the credit downgrades plaguing BBB-heavy funds.

These safeguards are critical as the municipal market faces headwinds. For instance, nearly a third of cities report budget concerns post-2026 due to expiring federal aid, while BBB-rated munis trade at 15-year lows in spreads. Funds lacking MMCA's credit rigor could see discounts widen as issuers struggle.

Tax Efficiency: A Lifeline for High-Tax State Residents

For California residents in the top federal tax bracket, the tax-equivalent yield of MMCA's 3.4% distribution is a game-changer. At a 7% tax-equivalent yield, it outshines taxable bonds and aligns with the state's high income taxes. This makes MMCA a superior income generator compared to peers like VTEB (Vanguard Short-Term Muni ETF), which offers lower yields despite shorter duration.

The fund's consistent dividends—uninterrupted since its 2015 launch—add further stability. In contrast, passive ETFs tied to volatile indices may face payout cuts during market dips, as seen in 2023 when some muni funds trimmed distributions due to liquidity strains.

Defensive Advantages in a Rising Rate Environment

With the Federal Reserve's policy path uncertain, intermediate-duration funds like MMCA thrive. Their moderate sensitivity to rate hikes avoids the volatility of long-duration peers, while their credit quality outperforms shorter-term funds lacking yield.

Consider this:
- Long-term muni ETFs (e.g., MLN) face double-digit price drops if yields rise sharply, widening their discounts.
- Short-term funds (e.g., SHM) may underperform due to lower yields, offering little upside in a rising-rate environment.

MMCA's intermediate stance, meanwhile, balances both risks and opportunities. Its modified duration to worst of 3–8 years ensures it can navigate gradual rate increases without excessive volatility.

The Bottom Line: A Portfolio Staple for California Investors

In 2025, the NYLI MacKay California Muni Fund stands out as a defensive powerhouse for three reasons:
1. Active management that avoids risky credits and sectors.
2. Intermediate duration that mitigates rate-risk without sacrificing yield.
3. Tax efficiency unmatched for high-bracket California residents.

While peers like MUB or MLN grapple with widening discounts and credit risks, MMCA's focus on quality and discipline positions it to deliver consistent income with minimal downside. For investors prioritizing stability in an uncertain market, this fund is a clear choice.

Investment Recommendation: Allocate 10–20% of a taxable bond portfolio to MMCA, especially if California municipal bonds dominate your holdings. Pair it with short-term Treasuries for further diversification, but avoid overexposure to long-duration funds lacking active oversight.

In a world of trade-offs, MMCA offers a rare combination: yield, tax efficiency, and resilience. For California investors, it's a foundation worth building on.