Navigating Rising Rates with Tax-Efficient Income: The Franklin Municipal Ladder 1–7 Year SMA Strategy

In an era where central banks are tightening monetary policy to combat inflation, investors face a paradox: the need for income generation clashes with the risks of rising interest rates. Traditional fixed-income assets, particularly long-duration bonds, have become vulnerable to volatility as yields climb. Yet, for those seeking tax-efficient income without sacrificing stability, the Franklin Municipal Ladder 1–7 Year SMA offers a compelling solution. This separately managed account (SMA) leverages a laddered maturity structure and a disciplined relative value approach to mitigate interest rate risk while maximizing yield—a strategy that could redefine the playbook for income-focused investors in today's environment.

The Laddered Structure: A Hedge Against Rate Uncertainty

The Franklin Municipal Ladder 1–7 Year SMA is built on a simple yet powerful principle: diversifying maturities. By investing in a portfolio of municipal bonds with staggered maturities ranging from one to seven years, the strategy ensures that a portion of the portfolio is consistently maturing and being reinvested. This approach addresses two critical challenges in a rising rate environment:

1. Reduced Duration Risk: Shorter maturities limit exposure to sharp rate hikes. As bonds mature, they can be reinvested at higher yields, capturing the upward trend in interest rates rather than being locked into outdated terms.
2. Predictable Cash Flow: The laddered structure provides regular liquidity, enabling investors to maintain income streams even as market conditions shift.

This is particularly valuable in 2025, where the Federal Reserve's 50-basis-point hike in June has already sent ripples through the bond market. For example, a bond maturing in 2026 can now be reinvested at yields 1.5% higher than in early 2024, a feature the SMA's active management team is poised to exploit.

Disciplined Relative Value: Beyond Passive Indexing

The SMA's success hinges on its active management. Unlike passive municipal bond funds that track broad indices, this strategy employs a relative value framework to identify mispricings and optimize returns. Portfolio managers analyze economic trends, credit fundamentals, and yield curve dynamics to construct a portfolio that is both high-quality and opportunistic.

For instance, the SMA's focus on AAA to A-rated municipal bonds (with an average credit quality of AA) ensures a buffer against default risk. Recent holdings, such as the Washington D.C. Metropolitan Area Transportation Authority Dedicated Revenue (yielding 8.31%) and Florida State Public Education (7.90%), reflect a balance between yield and safety. These selections are not arbitrary; they are the result of rigorous credit research and sector analysis.

Moreover, the SMA's team leverages the Remi ecosystem, a digital platform that personalizes portfolio construction based on investor preferences. This allows for dynamic adjustments to geographic diversification, sector allocations, and even state-specific tax benefits, ensuring the strategy adapts to both macroeconomic shifts and individual needs.

Tax Efficiency: A Silent Advantage

While rising rates have made municipal bonds more attractive in absolute terms, their tax-exempt status remains a unique selling point. For investors in high-tax brackets, the SMA's focus on municipal securities offers a dual benefit: income that is federal tax-free and, in some cases, state and local tax-free. This is particularly relevant in 2025, where top marginal tax rates in states like New York and California remain above 40%.

Consider the Wisconsin State Transportation Revenue bond, yielding 7.49%. For a New York-based investor in the 37% federal tax bracket, the after-tax yield of a taxable bond would need to exceed 11.86% to match the tax-exempt return. The SMA's ability to curate such opportunities across a laddered portfolio makes it a standout in a world where tax drag erodes returns.

Customization: Tailoring the Strategy to Your Needs

The SMA's flexibility further enhances its appeal. Investors can choose between state-specific, state-preference, or national-preference portfolios, each designed to align with their tax situations. For example, a Florida-based investor might prioritize bonds with Florida state tax exemptions, while a national investor could opt for a broader geographic mix. This customization is supported by daily monitoring of portfolio characteristics—such as duration, sector exposure, and credit quality—to ensure alignment with objectives.

A Call to Action for Income-Seeking Investors

As markets grapple with the lingering effects of rate hikes, the Franklin Municipal Ladder 1–7 Year SMA presents a rare combination of tax efficiency, risk mitigation, and yield optimization. Its laddered structure ensures that rising rates become an asset rather than a liability, while its active management and credit discipline provide a safety net for principal.

For investors seeking to navigate the current environment, the SMA offers a blueprint: shorten duration without sacrificing yield, leverage tax advantages, and stay agile in the face of uncertainty. In a world where traditional income strategies are under pressure, this approach is not just resilient—it's forward-looking.

In conclusion, the Franklin Municipal Ladder 1–7 Year SMA is more than a bond portfolio—it's a strategic response to the challenges of a rising rate era. For those who act now, it could prove to be one of the most tax-efficient tools in their arsenal.