Is FTAZX a strong bond fund right now?

If you have been looking for Muni – Bonds funds, a place to start could be Franklin Arizona Tax-Free Income A (FTAZX). FTAZX has a Zacks Mutual Fund Rank of 2 (Buy), which is based on various forecasting factors like size, cost, and past performance.

Objective

FTAZX is one of many Muni – Bonds funds to choose from. Muni – Bonds funds invest in debt securities issued by states and local municipalities, which are typically used to pay for infrastructure construction, schools, and other government functions. These securities can be backed by taxes (revenue bonds), but others are known as “general obligation” and are not necessarily backed by a defined source. These bonds are especially attractive because of their inherent tax benefits.

History of fund/manager

Franklin is based in San Mateo, CA, and is the manager of FTAZX. Since Franklin Arizona Tax-Free Income A made its debut in September of 1987, FTAZX has garnered more than $273.03 million in assets. The fund’s current manager is a team of investment professionals.

Performance

Of course, investors look for strong performance in funds. This fund carries a 5-year annualized total return of 0.61%, and is in the middle third among its category peers. Investors who prefer analyzing shorter time frames should look at its 3-year annualized total return of 3.94%, which places it in the middle third during this time-frame.

It is important to note that the product’s returns may not reflect all its expenses. Any fees not reflected would lower the returns. Total returns do not reflect the fund’s [%] sale charge. If sales charges were included, total returns would have been lower.

When looking at a fund’s performance, it is also important to note the standard deviation of the returns. The lower the standard deviation, the less volatility the fund experiences. Compared to the category average of 10.7%, the standard deviation of FTAZX over the past three years is 6.08%. Looking at the past 5 years, the fund’s standard deviation is 6.31% compared to the category average of 11.91%. This makes the fund less volatile than its peers over the past half-decade.

Bond duration

Modified duration is a measure of a given bond’s interest rate sensitivity, so when judging how fixed income securities will respond in a shifting rate environment, it is an excellent figure to look at.

If you believe interest rates will rise, this is an important factor to look at. FTAZX has a modified duration of 7.44, which suggests that the fund will decline 7.44% for every hundred-basis-point increase in interest rates.

Income

It is important to consider the fund’s average coupon because income is often a big reason for purchasing a fixed income security. This metric calculates the fund’s average payout in a given year. For example, this fund’s average coupon of 4.6% means that a $10,000 investment should result in a yearly payout of $460.

While a higher coupon is good for when you want a strong level of current income, it could present a reinvestment risk if rates are lower in the future when compared to the initial purchase date of the bond. Investors also need to consider risk relative to broad benchmarks, as income is only one part of the bond picture.

With a beta of 0.69, this fund is less volatile than a broad market index of fixed income securities. Taking this into account, FTAZX has a negative alpha of -0.23 , which measures performance on a risk-adjusted basis.

Expenses

For investors, taking a closer look at cost-related metrics is key, since costs are increasingly important for mutual fund investing. Competition is heating up in this space, and a lower cost product will likely outperform its otherwise identical counterpart, all things being equal. In terms of fees, FTAZX is a load fund. It has an expense ratio of 0.67% compared to the category average of 0.91%. So, FTAZX is actually cheaper than its peers from a cost perspective.

Investors need to be aware that with this product, the minimum initial investment is $1,000; each subsequent investment has no minimum amount.

Fees charged by investment advisors have not been taken into consideration. Returns would be less if those were included.

Bottom line

Overall, Franklin Arizona Tax-Free Income A ( FTAZX ) has a high Zacks Mutual Fund rank, and in conjunction with its comparatively similar performance, better downside risk, and lower fees, Franklin Arizona Tax-Free Income A ( FTAZX ) looks like a good potential choice for investors right now.