iShares Short-Term California Muni Active ETF Underperforming Compared to Peers

The article discusses the iShares Short-Term California Muni Active ETF (CALI) and finds it not to be the best choice due to its low duration. The article suggests that investors should consider other options for their California municipal bond investments.

Introduction:
The iShares Short-Term California Muni Active ETF (CALI) is a popular choice for investors seeking exposure to California municipal bonds with short-term maturities. However, a closer examination of this ETF's characteristics reveals that it may not be the best option for all investors. In this article, we will discuss the reasons why CALI's low duration may not be suitable for some investors and explore alternative options for California municipal bond investments.

Understanding CALI:
CALI is an actively managed ETF that seeks to invest at least 80% of its net assets in municipal securities issued by or on behalf of California state or local governments or agencies. The ETF primarily invests in investment-grade short-term fixed- and floating-rate municipal securities with remaining maturities of five years or less (1).

Low Duration:
One of the most significant drawbacks of CALI is its low duration. Duration is a measure of the sensitivity of a bond or bond portfolio to changes in interest rates. A lower duration indicates that the portfolio is less sensitive to changes in interest rates. While this may seem like an advantage in a rising interest rate environment, it can also limit the potential for capital appreciation.

Limited Capital Appreciation:
A low duration means that the ETF's investments are primarily focused on current income rather than capital appreciation. This may not be suitable for investors who are looking to grow their investments over time. Moreover, with the current low-interest-rate environment, investors may be missing out on potential capital gains by investing in a low-duration ETF like CALI.

Alternative Options:
Fortunately, there are alternative options for investors seeking exposure to California municipal bonds with higher durations and potential for capital appreciation. For instance, the iShares 20+ Year Treasury Bond ETF (TLT) and the iShares National Muni Bond ETF (MUB) are two popular options.

TLT is an ETF that invests in U.S. Treasury bonds with maturities of 20 years or more. While it does not invest specifically in California municipal bonds, it offers investors exposure to longer-duration fixed-income securities, which can be more sensitive to changes in interest rates and offer potential for capital appreciation.

MUB, on the other hand, is an ETF that invests in a diversified portfolio of national municipal bonds. While it does not invest specifically in California municipal bonds, it offers investors exposure to a broader range of municipal bonds with varying maturities and durations, which can help to diversify an investor's portfolio and potentially enhance returns.

Conclusion:
While the iShares Short-Term California Muni Active ETF (CALI) may be a popular choice for investors seeking exposure to California municipal bonds with short-term maturities, its low duration may not be suitable for all investors. For investors looking to grow their investments over time or seeking exposure to longer-duration municipal bonds with potential for capital appreciation, alternative options like the iShares 20+ Year Treasury Bond ETF (TLT) and the iShares National Muni Bond ETF (MUB) may be worth considering.

References:
1. iShares. (2023). iShares Short-Term California Muni Active ETF. Retrieved from https://www.ishares.com/us/products/240915/ishares-short-term-california-muni-active-etf