Municipal bond exchange traded funds have become a go-to investment for their decent yields when the tax break is factored in. They offer liquidity, diversification and an income stream for investors.

“A quick primer: Muni bonds come in two flavors — revenue bonds and general obligation bonds. Revenue bonds fund improvements in projects like airports or power plants that generate income. These bonds can repay investors only from that income. In a GO bond, municipalities can raise taxes to repay bondholders,” Susan J. Aloise wrote for InvestorPlace. [Muni-Bond ETFs Stay the Course]

According to Thompson Reuters data, muni-bond ETFs touted $1.1 billion in inflows for the week ended August 8, marking the highest level in 5 months.

The latest concern regarding the muni-bond market concerns the recent bankruptcy filings of three California municipalities — San Bernadino, Stockton and Mammoth Lakes. SEC Chairman Mary Schapiro told Congress last month that the nearly $4 trillion market needs mandatory disclosure rules and uniform accounting standards to better protect investors. The better transparency will help investors understand the muni-market and the risks involved. [Muni-Bond ETFs Yawn at Latest Bankruptcy]

For those investors that want exposure to this corner of the market, with the ease of one-shot diversification and better liquidity, ETFs may be the answer. Here are a few to consider:

  • Market Vectors High Yield Municipal Index (NYSEArca: HYD) This ETF has $781 million in assets, and focuses on lower credit quality, higher-yielding bonds. The fund boasts a current dividend yield of 5.1%. HYD’s year-to-date return is nearly 12%, and it has an expense ratio of 0.35%.
  • iShares S&P AMT Free Municipal Bond Fund (NYSEArca: MUB)Top holdings include bonds from California, Illinois, South Carolina and Texas. With more than $3 billion in assets, MUB has a current dividend yield of 3%. Its year-to-date return is nearly 5%, and it has a tiny expense ratio of 0.25%.
  • PowerShares Insured National Municipal Bond Portfolio (NYSEArca: PZATop holdings include revenue bonds for Puerto Rico, Florida, Texas and New Jersey. With nearly $815 million in assets, PZA has a current dividend yield of 4.2%. Its year-to-date return is 7.5%, and it has an expense ratio of 0.28%.
  • Market Vectors Long Municipal Index (NYSEArca: MLNMLN is the smallest ETF in this group with assets of $102 million. It has a current dividend yield of 4%. Its year-to-date return is 7.9%, and it has an expense ratio of 0.24%. [Uncertainty Over Tax Breaks May Hit Muni-Bond ETFs]

Tisha Guerrero contributed to this article. 

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