Investors are using ETFs to buy a basket of municipal bonds and reduce the risk of an individual local government defaulting on its obligations.
Also, the tax break on income from muni bonds makes the yield attractive to some investors.
“Municipal-bond funds in general are most suitable for use by investors in high annual tax brackets for use in their taxable accounts. The reason is that interest income from municipal bonds is tax-free at the federal level. Therefore, investors with the highest marginal tax rates are able to best utilize the tax-shielding profits and maximize their return on the bonds,” Timothy Stratus wrote on Morningstar.
iShares S&P National Municipal Bond Fund (NYSEArca: MUB) can reduce the risk of exposure to municipal defaults as municipalities have been blind-sided by falling tax receipts in the wake of the housing crash. MUB can also be used as a compliment for single-issue holdings, reports Strauts. MUB yields 1.76% [Are Muni-Bond ETFs Facing an Inflection Point?]