NEA: Outperformer With A 4.7% Yield Is A Benchmark For Muni Bond Investors

Summary

• NEA invests in investment-grade municipal bonds exempt from federal income taxes and the alternative minimum tax.
• The fund has hiked its distribution monthly distribution twice this year and currently yields 4.7% based on its actively managed strategy and use of leverage.
• We highlight NEA's strong total return performance record which has outperformed muni bond benchmarks.
• The fund is a good option as a long-term holding for exposure to munis in the context of a diversified portfolio.

The Nuveen AMT-Free Quality Municipal Income Fund (NYSE:NEA) is an actively managed closed-end fund "CEF" that invests in a portfolio of tax-exempt municipal securities. NEA targets investment-grade issuers while utilizing leverage to enhance income. Indeed, the attraction of NEA is its monthly distribution that currently yields 4.7%, well above rates offered through passive funds or indexed investment-grade munis.

Despite this year's pandemic which resulted in widespread financial disruptions, NEA has favorably climbed 8% on a total return basis supported by the low interest rate environment and all-in approach by the Fed and on the fiscal side to support economic conditions. We like NEA given its long-term track record of outperforming muni benchmarks and expect the stabilizing macro outlook to continue generating positive returns through next year.

(Source: finviz.com)

NEA Background

The fund with an inception date in 2002 and currently $6.7 billion in total managed assets is the largest CEF investing in municipal bonds. State and local governments issue muni bonds to generally fund public works including transportation, water management systems, and other infrastructure requirements.

The fund name including the term "quality" highlights the high average credit rating in the portfolio which is currently 66% in 'A' rated or better issuances. It's worth noting that the NEA fund strategy includes some flexibility to include a small percentage in non-investment grade munis, currently at about 6% along with 10.7% which are technically "not rated" by credit rating agencies. As mentioned, the fund does utilize leverage which is currently at 37.4% on an effective basis. The average maturity of the bond portfolio at 18.4 years highlights the long-term outlook and overall higher duration exposure.

(Source: Nuveen)

While the interest paid on municipals is typically tax-exempt, NEA specifically focuses on a segment within munis that are also free of the alternative minimum tax "AMT-free." AMT is

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.