TEPAX
American Funds TaxExempt Preservation-A
Introduction to TEPAX’s Unique Offering
The American Funds TaxExempt Preservation-A (TEPAX) is a mutual fund designed to provide investors with current income that is exempt from federal income tax, while also focusing on the preservation of capital. This fund primarily invests in municipal bonds, which are known for their tax-exempt status, making it an attractive option for investors seeking to minimize their tax liabilities. With a focus on short-term municipal bonds, TEPAX aims to offer a stable income stream with lower volatility compared to longer-duration bond funds. The fund’s strategy is particularly appealing to conservative investors who prioritize capital preservation and tax efficiency.
At A Glance
Executive Summary
TEPAX offers tax-exempt income with a focus on capital preservation, featuring a 2.25% yield and a 0.58% expense ratio, ideal for conservative investors.
Tax-exempt income focus Capital preservation strategy Low volatility with short-term muni bonds
Lower returns compared to peers Negative alpha and Sharpe ratio Limited growth potential
Performance Analysis: Navigating Market Conditions
TEPAX has demonstrated a mixed performance over various time frames, with a notable 5.25% return over the past year, outperforming its benchmark, the BBG Muni USD Index, which returned 7.51%. However, its longer-term performance has been more modest, with a 1.06% annualized return over five years and 1.40% over ten years. The fund’s focus on short-term municipal bonds has helped it maintain stability, but it has struggled to keep pace with some of its peers in terms of returns. The fund’s negative alpha of -2.27% and Sharpe ratio of -1.17 indicate that it has not effectively compensated investors for the risks taken, highlighting the importance of its tax-exempt income focus as a primary benefit.
Portfolio Composition: A Focus on Municipal Bonds
The portfolio of TEPAX is heavily weighted towards municipal bonds, which constitute 49.33% of its bond sector allocation. This focus aligns with the fund’s objective of providing tax-exempt income. Additionally, the fund holds 19.28% in government bonds and 19.00% in securitized assets, further diversifying its bond holdings. The fund’s top holdings include American Funds Ltd-Term Tx-Ex Bd R-6 and Capital Group Short Duration Income ETF, which together make up a significant portion of the portfolio. This strategic allocation is designed to minimize risk while providing a steady income stream, making it suitable for investors seeking stability and tax efficiency.
Risk Metrics: Understanding Volatility and Drawdowns
TEPAX exhibits a low beta of 0.58, indicating lower volatility compared to the broader market. This is consistent with its focus on short-term municipal bonds, which tend to be less volatile than longer-duration bonds. The fund’s standard deviation of 0.56% further underscores its stability. However, the fund has experienced a maximum drawdown of -1.2%, which occurred between October and November 2024. Despite this, the fund’s downside risk remains relatively low, with a downside risk (UI) of 0.40. These metrics suggest that while TEPAX offers stability, investors should be aware of its limited upside potential, as indicated by its upside potential of -5.70.
Comparative Analysis: How TEPAX Stacks Up Against Peers
When compared to similar funds, TEPAX offers a competitive yield of 2.25%, though it falls short in terms of returns. For instance, the Colorado BondShares A Tax-Exempt (HICOX) and MFS Municipal High Income-A (MMHYX) have delivered higher one-year returns of 12.23% and 15.20%, respectively. Additionally, these funds have lower expense ratios, making them potentially more attractive to cost-conscious investors. However, TEPAX’s focus on capital preservation and tax-exempt income may still appeal to conservative investors who prioritize stability over higher returns. The fund’s expense ratio of 0.58% is higher than some peers, but it reflects the active management required to maintain its tax-exempt status.
Investor Suitability: Who Should Consider TEPAX?
TEPAX is particularly well-suited for conservative investors who prioritize tax efficiency and capital preservation. Its focus on short-term municipal bonds makes it an ideal choice for those seeking a stable income stream with minimal volatility. The fund’s tax-exempt income is especially beneficial for investors in higher tax brackets looking to reduce their tax liabilities. However, investors seeking higher returns or growth potential may find TEPAX less appealing, given its lower performance metrics compared to some peers. Overall, TEPAX is a solid option for those who value stability and tax efficiency over aggressive growth.
Expense Ratio and Cost Considerations
The expense ratio of TEPAX stands at 0.58%, which is relatively high compared to some of its peers, such as BlackRock Short-Term Municipal-InvA (MELMX) and Allspring Short-Term Municipal Bond-A (WSMAX), which have expense ratios of 0.006000 and 0.006300, respectively. This higher expense ratio reflects the active management involved in maintaining the fund’s tax-exempt status and its focus on capital preservation. While the cost may be a consideration for some investors, the fund’s tax-exempt income and stability may justify the expense for those prioritizing these attributes. Investors should weigh the cost against the benefits of tax efficiency and capital preservation when considering TEPAX.
Conclusion: TEPAX’s Place in a Diversified Portfolio
In conclusion, the American Funds TaxExempt Preservation-A (TEPAX) offers a unique blend of tax-exempt income and capital preservation, making it an attractive option for conservative investors. While its returns may not match those of some peers, its focus on stability and tax efficiency provides a compelling case for inclusion in a diversified portfolio. Investors seeking to minimize tax liabilities while maintaining a stable income stream will find TEPAX to be a valuable addition. However, those looking for higher returns or growth potential may need to consider other options. Overall, TEPAX stands out for its commitment to tax-exempt income and capital preservation, aligning well with the needs of risk-averse investors.
Similar Securities
ORSTX: Invesco Short Term Municipal-A | Tax-Exempt Income Investment
ORSTX offers tax-exempt income with a 3.23% yield, focusing on short-term municipal bonds. Its 0.74% expense ratio is competitive in its category.
OLCAX: Invesco CA Limited-Term Municipal-A | Tax-Exempt Income Investment
OLCAX offers tax-exempt income with a focus on California municipal bonds, featuring a 2.92% yield and a 0.93% expense ratio.
FFTFX: Franklin Federal Limited-Trm T/F Inc-A1 | Tax-Exempt Income Strategy
FFTFX offers tax-exempt income with a 2.66% yield and low volatility, ideal for conservative investors seeking short-term muni exposure.
LTNYX: Invesco Rochester Ltd-Term NY Muni-A | Tax-Exempt Income for NY Residents
LTNYX offers tax-exempt income with a 3.23% yield, focusing on NY municipal bonds. Its 0.90% expense ratio is competitive in its category.
TEPAX: American Funds TaxExempt Preservation-A | Tax-Exempt Income & Capital Preservation
TEPAX offers tax-exempt income with a focus on capital preservation, featuring a 2.25% yield and a 0.58% expense ratio, ideal for conservative investors.
Futher Reading
https://www.morningstar.com/funds/xnas/TEPAX/quote
https://finance.yahoo.com/quote/TEPAX/”>Yahoo: American Funds TaxExempt Preservation-A
https://ftcloud.fasttrack.net/web/chart/TEPAX
https://www.wsj.com/market-data/quotes/mutualfund/TEPAX
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