PIMCO ETF Manager Bill Gross Buying Munis on Looming Taxes

December 1st at 6:38am by Tom Lydon

With the fiscal cliff looming over America and potential tax hikes across the board, Bill Gross, the manager behind the PIMCO Total Return Fund, believes tax-free municipal bonds are an attractive option. Investors can gain access to the muni bond securities through the exchange traded fund investment vehicle.

If the government does not reach an accord by the end of the year, $607 billion in automatic spending cuts and tax increases will take affect starting January, reports Michelle Kaske for Bloomberg. [Muni Bond ETFs Solid on Tax Fears, Rock-Bottom Yields]

“Muni bonds, which are tax-free, would be a valuable type of asset going forward,” Gross, said in the article.

“Most assets are bubbly. Municipal bonds much less so due to potential tax changes,” Gross said in a recent twitter message.

The PIMCO Total Return ETF (NYSEArca: BOND) has 9% of its weighting allocated to municipals. BOND has a 2.53% 30-day SEC yield.

Currently, munis are providing attractive yields relative to Treasuries. The 10-year munis have offered higher yields than Treasuries over the last year, whereas muni yields have typically been at 93% of federal yields on average since 2001 – investors would accept the lower yields due to the tax-exempt status on municipal bonds. [Muni Bond ETFs Hit on Tax Worries]

Gross has also upped his position in municipal bonds as a result of the securities’ stability compared to other fixed-income assets – munis could return more than federal debt when considering volatility.

Somee municipal bond watchers are wary of potential changes to the tax-exempt status on municipal bonds. Observers warn that Congress could curb the tax exemption as a way to help lower the government’s runaway deficits. However, such a move seems unlikely and would be met with significant resistance.

Some municipal bond ETFs include:

  • iShares S&P National Municipal Bond Fund (NYSEArca: MUB): 1.57% 30-day SEC yield
  • SPDR Nuveen Barclays Capital Short Term Municipal Bond ETF (NYSEArca: SHM): 0.41% 30-day SEC yield
  • SPDR Nuveen Barclays Capital Municipal Bond ETF (NYSEArca: TFI): 1.59% 30-day SEC yield
  • PowerShares Insured National Municipal Bond Portfolio (NYSEArca: PZA): 2.91% 30-day SEC yield
  • Market Vectors Intermediate Municipal Index ETF (NYSEArca: ITM): 1.76% 30-day SEC yield

For more information on munis, visit our municipal bonds category.

Max Chen contributed to this article.

Full disclosure: Tom Lydon’s clients own BOND.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.