In the ongoing search for yield, some have branched out to high-yield municipal bond exchange traded funds, but investors will need to consider specific risks associated with the muni market.
Investors funneled $43 billion into muni bond funds, with $10 billion going into high-yield municipals, over the first nine months, reports Steven Rosenbush for The Wall Street Journal. Year-to-date, the muni market has gained about 13%.
Municipal bond ETFs have been rallying recently on expectations that the Obama administration will raise taxes, which would make the tax-exempt status of munis that much more attractive. However, there is speculation that the government may potentially remove the tax-exempt status to help with the deficit problems. [Muni Bond ETFs Hit on Tax Worries]
“We think high-yield municipal debt is compelling and will remain so for some time, but certainly, there are risks,” Gary M. Fuqua, managing director and head of high-yield and distressed municipal strategies at Spring Mountain Capital LP, said in the article. [Muni Bond ETFs and Tax Uncertainty]
Municipal bond holders will have to consider event risks. High-yield munis include riskier issues, such as municipal entities that own airport terminals and rely on airliners. For instance, late 2011, AMR Corp., the parent company of American Airlines, filed for bankruptcy protection.