Timing Could Be Right To Add Muni-Bond ETFs To Your Portfolio

September 03, 2008 at 3:00 pm by Tom Lydon

Do municipal bond exchange traded funds (ETFs) have a place within your portfolio?

Fund companies have been churning out these new types of ETFs over the past year, and if you believe tax rates are going to go up, then these ETFs may look even more attractive, says Eleanor Laise for The Wall Street Journal.

The troubled times have actually weighed these funds down, with the credit crunch and mortgage meltdown in full effect. The bonds are so bogged down, they may actually be a good buy now, some say.

While muni-bond funds do have many tax advantages, their yields are lower than those of U.S. Treasury bonds. Municipal bonds are issued by state and local governments, and often times are exempt from federal, state and local income tax.

As of now, safety-minded investors have fled toward the Treasury bond ETFs, and this has actually driven the prices up and the yields down. The rseult has been that they’re now about equal with the muni-bond. Muni-bond ETFs have low costs and the average expense ratio is at 1.01% of assets. Investors who believe tax rates are going to go up have a reason to consider the bonds.

Laise recommends the calculator at Investing In Bonds - you can enter your state, net taxable income and tax-filing status to see the yield you need to earn on a taxable security to match the tax-free yield of a muni bond.

Some to choose from:

  • iShares S&P National Municipal Bond Fund (MUB), up 0.6% year-to-date
  • PowerShares Insured National Municipal Bond Portfolio (PZA), down 3.1% year-to-date
  • SPDR Lehman Brothers Municipal Bond (TFI), up 0.7% year-to-date
  • Market Vectors-Lehman Brothers AMT-Free Short Municipal Index (SMB), up 2.2% since Feb. 28 inception

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2 Comments For This Post

  1. BERCHTA DALE Says:

    Out of many methods you can invest your money Municipal Bonds happen to be one of the famous. However when you invest in Municipal Bonds you have to be aware of municipal bond rates too. Municipal bonds rating indicate the merit of municipal bonds which depends on whether the bond is backed by the full faith, credit, and taxing powers of the municipality or by revenues generated by the municipal facility the bond issue finances. Consider issuer-specific information such as the wealth of the community, characteristic of the issuer, revenue stream of the project the bond is used to fund. By examining the municipal bond, you can see if it should have high ratings or low based on the factors above.

  2. Tom Lydon Says:

    Hi Berchta,

    You’re absolutely right that with any bond, there are many factors that must be considered! Thank you for outlining them.

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