FMNY Dividend Sustainability: Navigating SALT Reforms and Liquidity Risks in NY Municipals

The First Trust New York Municipal High Income ETF (FMNY) has long been a go-to vehicle for investors seeking high-yielding tax-exempt income, particularly in a high-tax state like New York. However, as Congress debates sweeping reforms to the SALT (State and Local Tax) deduction, the sustainability of FMNY’s dividends faces unprecedented uncertainty. With the $10,000 SALT cap set to expire at year-end . 2025, legislative outcomes could redefine demand for municipal bonds—and investors must act now to assess whether FMNY’s yield advantage remains intact.

The SALT Reform Crossroads: A Double-Edged Sword for Tax-Exempt Yields

The Tax Cuts and Jobs Act (TCJA) of 2017 capped SALT deductions at $10,000, a policy set to expire by December 2025. Current proposals aim to raise this limit to $40,000 for most taxpayers, with phaseouts for incomes over $500,000. While this may provide relief to affluent New Yorkers, it also reduces the relative appeal of tax-exempt municipal bonds. High earners in high-tax states previously relied on the SALT deduction to offset taxable income; with a higher cap, their need for tax-free income could diminish, potentially reducing demand for ETFs like FMNY.

Yet, the reforms also carry fiscal risks. A $40,000 cap would cost $334 billion over a decade, per the Penn Wharton Budget Model, and disproportionately benefit top earners. This could fuel political pushback, with some lawmakers advocating for stricter phaseouts or even a permanent $10,000 cap. For FMNY investors, the outcome will determine whether its high-yielding portfolio—weighted toward New York’s lowest-rated issuers—retains its tax-advantaged allure.

Liquidity Risks: The Hidden Threat to Dividend Stability

FMNY’s focus on high-income municipal bonds means it holds a significant portion of lower-rated securities, such as general obligation bonds from cash-strapped localities or revenue bonds tied to volatile projects. While these offer juicy yields, they also carry liquidity risks. Should SALT reforms reduce demand for municipal bonds—or if broader market volatility strikes—FMNY’s underlying holdings could become harder to sell at fair prices. This illiquidity could force the ETF to dilute dividends or incur markdowns, eroding returns.

Consider the 2020 pandemic selloff: municipals with lower liquidity saw spreads widen dramatically. FMNY’s expense ratio of 0.47% provides some cushion, but its average effective duration of 10 years exposes it to interest rate and credit shocks. Investors must ask: Can FMNY maintain distributions if liquidity tightens?

Why FMNY Remains a Buy—For Now

Despite the risks, FMNY retains compelling attributes for aggressive income seekers. First, New York’s fiscal reforms, including property tax caps and pension relief, have stabilized some issuers’ creditworthiness. Second, the ETF’s 5.8% SEC yield (as of May 2025) outpaces taxable alternatives for high earners in the 37% tax bracket. Finally, the SALT debate remains unresolved, creating a “wait-and-see” opportunity: if reforms fail to pass, demand for tax-exempts could surge.

Strategic Recommendations for FMNY Investors

1. Lock in Yield Before 2025: With SALT reforms likely finalized by year-end, act before uncertainty grows. FMNY’s current yield provides a hedge against rising taxable rates.
2. Pair with Liquidity Hedges: Use inverse interest rate ETFs (e.g., TLT) or cash reserves to offset potential liquidity crunches in municipals.
3. Monitor Credit Downgrades: Track issuers like New York’s school districts or transit authorities—those with deteriorating credit could drag on FMNY’s NAV.

Conclusion: A High-Reward, High-Risk Play

FMNY’s dividends are far from guaranteed. Investors must weigh the allure of its 5.8% yield against the twin risks of SALT-driven demand shifts and liquidity constraints. For those willing to bet on New York’s fiscal resilience and legislative gridlock delaying reforms, FMNY offers outsized income potential. But with $334 billion in fiscal stakes and political fireworks ahead, this is a trade best sized small and monitored closely. Act swiftly—before the SALT debate reshapes municipal markets forever.