Municipal bond mutual funds increased 14.4% on average through Oct. 29 and yields have not experienced their current lows in more than four decades, reports Jonathan Burton for The Wall Street Journal. The surge in muni bonds may be over, but some believe this investment vehicle still have a place in many portfolios, especially as tax time looms. (The current bond hot spots).

Many states face deep budget deficits, potential downgrade risk and headline risk. Bonds usually drop in price when credit ratings are bad or when budget deficits are high.

Still, muni bonds appeal to investors because of of their tax-free income status. Munis are generally exempt from federal and state level taxes. Their tax-free status will become more appealing as federal income taxes become higher as the Bush administration’s tax cuts expire at the end of 2010.

Currently, the supply/demand imbalance is supporting the price of municipal bonds. Professionals suggest potential investors stick to bonds with at least a single-A rating. They also note that long-term bonds are more susceptible to interest rate changes and don’t provide enough to compensate. (What you need to know about bond ETFs).

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

• PowerShares Insured National Muni Bond (NYSEArca: PZA): up 16.3% year-to-date; yields 4.5%

• iShares S&P National Municipal Bond (NYSEArca: MUB): up 5.9% year-to-date; yields 3.6%

• SPDR Barclays Capital Municipal Bond (NYSEArca: TFI): up 8.1% year-to-date; yields 3.68%

• Market Vectors Long Municipal (NYSEArca: MLN): up 20.4% year-to-date; yields 4.49%

Max Chen contributed to this article.

Last year, investors turned to Treasuries as a last ditch wealth-preservation effort. Today, Treasuries have been made less appealing as prices fall and the government runs up a deficit, according to Financial Planning. Tax rolls are also down at the state and city level, which doesn’t make the outlook for municipal bonds that much better.

But investors have alternatives that can give diversification and varying yields:

• Intermediate bond funds that include a mix of government, mortgage and investment-grade corporate bonds
• Treasury inflation-protected securities (TIPs)
• Non-government investments, such as corporate bonds

Treasury bond prices may continue to fall for the time being. The government is issuing more debt, the economy is stabilizing and the Federal Research is purchasing more Treasuries, a recipe for declining bond prices, says John Parry for Reuters. This has put the central bank in a quandary: lower demand for safe havens means higher yields, which threatens to keep a lid on consumer borrowing, further hampering economic growth.

• PowerShares Insured National Muni Bond (PZA): up 9.3% year-to-date; yields of 4.9%

• iShares Lehman 7-10 Yr Treasury Bond Fund (IEF): down 7.7% year-to-date; yields 3.9%

• iShares Lehman TIPS Bond Fund (TIP): up 3.2% year-to-date; yields 4.4%

• iShares iBoxx $ Invest Grade Corp Bond (LQD): up 4.5% year-to-date; yields 5.6%

For more information on bonds, visit our bonds category.

For full disclosure, Tom Lydon’s clients own shares of LQD and TIP.

Max Chen contributed to this article.

During this crazy bear market and market meltdown, optimistic investors have been turning to dividend-rich exchange traded funds (ETFs) to answer their prayers. But what if the funds have lost more than what they yield? What’s the point of them then?

One reader of ours wonders:

Can someone please explain to me why ETFs that have lost more over the last month than their dividend yield would be attractive?  Or stocks for that matter?  Isn’t this yield only attractive if you think they have bottomed? Is there something I am not getting about dividend stocks??

The answer: Dividend yields on a particular market segment are a concrete measure of the market’s valuation levels-whether those stocks are offering attractive terms to entice you to invest in them compared to their competing asset classes.

Stocks’ biggest competition comes from either cash or bonds. The short term returns on money markets are at or near zero today. The 10-year U.S. government bond is yielding under 3%, the lowest level in more than 50 years.

These low yields in bonds offer the least enticing terms this century for bonds, and the primary reason investors are accepting these low yields today is an extreme amount of risk aversion about losing money in stocks.

The Dividend Yield on a basket of large cap us dividend stocks measured relative to the dividend yield on the S&P 500 is also another valuation measure to gauge the attractiveness of the dividend basket.

Of course, the market always could move more in the short term than the dividend yield offers you. But owning stocks was never supposed to be a risk free proposition, and we believe having strong underlying valuation metrics such as the dividend yield underpinning your investment is the best way to minimize that risk.

Simon Maierhofer for ETF Guide notes that double-digit capital gains in 2008 pushed dividends to the back burner. As the Dow Jones Industrial Average and S&P 500 touched on new highs in 2007, dividends were simply a moot point to most investors.

But now, investors are hungrily on the hunt for yield again. Here are nine ETFs delivering such yields:

• iShares FTSE NAREIT Retail ETF (RTL): which got slaughtered in 2008, but shoots of an impressive yield of 13.6%
• PowerShares Financial Preferred Portfolio (PGF), we all know how well this sector performed last year, but PGF yields 13.6%
• iShares S&P U.S. Preferred Stock ETF (PFF), a yield of 10.8%
• iShares iBoxx High Yield Corporate Bond ETF (HYG), producing a yield of 10.6%
• PowerShares Insured National Municipal Bond Portfolio (PZA), a 5% yield, but keep in mind that this yield is partially tax-free
• iShares DJ Select Dividend ETF (DVY), a fairly well-established ETF that has a generous exposure to financials and generates a yield of 6.9%
• State Street’s S&P Dividend ETF (SDY), shooting off a yield of 6.3%
• SPDR DJ Wilshire Large Cap Fund (ELV), producing a modest yield of 5.1%
• iShares Russell 1000 Value ETF (IWD), generating a yield of 4.2%

Although these yields are very tempting, remember that the markets have really taken a hit in the last year.  Remember to watch the trendlines and do your homework before throwing any extra change into the market.

Conventional wisdom would suggest that investors should continue to focus on the U.S. Treasury market. However, it is much believed that this market is in a bubble and will be the next to burst. Instead, Chance Carson for Index Universe suggests taking a look at the following asset classes:

• Mortgage-Backed Securities: With the Fed’s intervention and purchase of up to $500 million of troubled mortgage-related bonds, this asset class offers the same security as U.S. Treasuries while shooting off significantly higher yields. Take a look at the iShares Barclays MBS Bond Fund (MBB), offering a yield of 4.36% and only down 1% over the last month.

• Treasury Inflation Protected Securities (TIPS): The theme of many recent discussions has been the growing risks of worldwide deflation, which has sent TIPS prices plummeting and yields out the roof; however, a combination of the gargantuan Federal stimulus plan, the slowdown of the deleveraging cycle and the reliquification of asset managers, should cause inflation to skyrocket, which is good news for TIPS. Take a look at SPDR Barclays Capital TIPS (IPE), up 2.1% over the last month and generating a yield of 5.88%.

• Municipal Bonds: The beauty with this class is that defaults are generally rare for investment-grade municipals, prices are relatively cheap, yields are high and Uncle Sam doesn’t get his piece of the pie. Take a look at the PowerShares Insured National Municipal Bond Portfolio (PZA), up 1.5% over the last month with a 5% tax-free yield. If you really want to play it safe, take a look at Market Vectors Pre-Refunded Municipal Index ETF (PRB), it is 100% fully guaranteed by the U.S. government. It just launched last week.

• High-Grade Corporate Bonds: These bonds are dirt-cheap and are offering yields that are 5%-6% higher than a comparable maturity Treasury. Additionally, the federal government has mitigated a bit of the risk by bailing out some troubled institutions. If you decide to add these assets to your portfolio, take a look at iShares iBoxx $ Investment-Grade Corporate Bond Fund (LQD), which is made up of 100% investment grade corporate bonds, offers a 5.61% yield and is down 3.1% over the last month.

No matter how turbulent times are, there is always a winner somewhere; even 2008 was glamorous for some. Remember, in order to maximize your portfolio and not take a hit as big as the one that many of us took in 2008, diversify, watch the trends and keep yourself up to par on financial news.

Jo Eqcome for Seeking Alpha points out that 41 out of 50 states are reporting budgeting shortfalls for the year 2009, with prospects of bankruptcy looming. Muni bond ETFs are poised to do well, for the following reasons:

• Fixed-income markets are on the mend, thanks to improving credit markets
• A Federal stimulus package would support the muni bond market, as the new Presdidency takes action
• Investment characteristics such as discounts to NAVs and spreads to Treasuries
• Year-end tax selling may cause a “bounce”

The muni ETF have lower management fees than the closed end fund (CEFs) and use little leverage, among other differences. They offer a conservative approach to long-term investing within the muni bond market.

• PowerShares Insured National Muni Bond Fund (PZA): down 9.8% for one year

• iShares S&P National Muni Bond Fund (MUB): up 1.7% for one year

After several sessions of declines, municipal bonds and the exchange traded funds (ETFs) that track the sector seem to be attractive and might be a great bargain.

• Yields on AAA-rated general obligation muni bonds are about 1.5% higher than those of Treasuries and these tools are generally tax-exempt.
• Another reason muni bonds have appeal is that rising deficits, especially in states such as California, Minnesota and Ohio, will keep yields high. Muni bonds will eventually deviate back to their normal prices, may give you a gain, but will not translate into quick riches.

Although muni bonds are tempting, they aren’t foolproof. The bond market has been hit by leveraged investors fleeing causing a severe lack of liquidity and credit downgrades to bond insurers, states Mina Kimes of Fortune Magazine. This raises the issue of default in these bonds – in tough times like these, many cities are nearing bankruptcy.

Another issue coming up in the bond market is a new nationwide inquiry that’s been launched. Federal agencies and some state attorneys general have been gathering evidence of what might be collusions among banks and companies that have helped state and local governments take about $400 billion worth of municipal notes and bonds to market every year, reports Mary Williams Walsh for The New York Times.

The issue is concerning now, because the incoming administration is preparing a stimulus package that would spawn projects carried out and financed at the state and local level. Some estimates have as much as $4 billion a year vanishing into the system.

If interested in this market, a sampling of the many funds are: PowerShares Insured National Muni Bond (PZA) has a yield of 5.11% , with a taxable equivalent of about 7.8% ; iShares S&P National Municipal Bond Fund (MUB) has a yield of 3.7%, with a taxable equivalent of about 5.6%; SPDR Lehman Municipal Bond ETF (TFI) has a yield of 3.9%, with a taxable equivalent of about 6%.

Of course, this all assumes that he’s able to get his proposals and policies through.

The steps taken by the federal government to combat the crisis are already sending the federal deficit upward and any decisions about further spending will come as spending for Social Security, Medicare and Medicaid are also projected to increase significantly. This will make any decision for Obama more difficult and restricted than he may anticipate.

Muni bonds are more attractive on an after-tax basis so Obama’s tax plan is more conducive to these funds doing well because of the after-tax yield.

Obama would extend the 10%, 15%, 25% and 28% tax rates, but immediately restore the 36% and 39.6% rates for the highest income taxpayers – and adjust them so that they apply to individuals with incomes of more than $200,000 and married couples with incomes of more than $250,000, report Patrick Temple-West, Peter Schroeder, Audrey Dutton, and Lynne Funk for Financial Planning.

Tax rates are the number one determinate of relative value for munis. One analyst says that long-term muni bonds are currently yielding about 6%. If the tax rate for the highest tax bracket rose to 39%, the taxable equivalent yield on that same long bond would be about 8%. A 5% yield for an investor in the 40% tax bracket is equivalent to an 8% return on a double-A, 15-year bond.

• PowerShares Insured National Municipal Bond Portfolio (PZA), down 11.8% year-to-date

This is the first time in 76 years that an election is taking place during a financial meltdown/crisis. Ben Steverman for BusinessWeek reports that based on recent polls, the coincidence seems to have boosted the chances that Illinois Sen. Barack Obama, the Democratic nominee, will defeat Republican Arizona Senator John McCain on Nov. 4.

The biggest myth concerning the stock market and the election is that the market is waiting to see who wins the election. If the polls are to be believed, there is little doubt who will win at this point in time and stock traders are used to weighing probabilities, looking at data, and making investing bets based upon them.

For example, a win for Sen. Obama would send alternative energy ETFs and stocks higher, while health care would suffer based on the notion that Obama would crack down more on high malpractice insurance costs and their effect on the overall health care industry, reports Paul R. LaMonica for CNN Money.com.

An ETF that could be impacted is Van Eck Market Vectors Global Alternative Energy (GEX).

A win for McCain, the Republican party candidate, would send aerospace and defense stocks and ETFs into the air, but coal and ethanol would wither. Nuclear energy would also benefit under McCain’s presidency.

PowerShares Global Nuclear Energy Portfolio (PKN) could be impacted in a McCain win.

As the financial headlines remind us daily, the next president will have to answer two important questions: How much will his proposals cost, and where will we get the money? This is especially true in regards to America’s aging infrastructure, which is deemed the “$1.6 Trillion Question.”

Over the next five years, we could potentially need $1.5 trillion to expand and modernize America’s infrastructure problems. Harold L. Sirkin for BusinessWeek says that infrastructure expenditures we make today are intended to work for us for the next 30 to 100 years. Investing in infrastructure creates value for the economy, which increases our competitiveness.

• iShares S&P Global Infrastructure Fund (IGF)

• Market Vectors Steel (SLX)

One simple question with no simple answer has centered around the small-business owners of the world – the “Joe the Plumbers,” if you will. First, the definition of small business varies, with a two-person enterprise qualifying, as well as a construction company with $33.5 million or less in sales, according to the Small Business Administration.

Sen. Obama’s plan would raise the marginal tax rate on incomes above $250,000 a year to 36% and 39.6%, from the current 33% and 35%, effectively returning top tax rates to their levels during the 1990s. Sen. McCain has proposed reducing corporate tax rates from 35% to 25%, but that would only potentially affect about a quarter of small-business owners, reports Amy Schatz for The Wall Street Journal.

Sen. Obama would raise capital gains tax rates for families earning more than $250,000 to 20% from 15%. But the Obama plan would eliminate capital gains taxes for investors and entrepreneurs in small firms. Neither candidate is concrete on definitions or restrictions and benefits when it comes to this topic.

How are both candidates going to preserve our technological innovation as well as expand on it? Their visions are polar opposites and the gap is widening at $60 billion. McCain’s deal seeks to encourage innovation by cutting corporate taxes and ending what he calls “burdensome regulations” that he says inhibit corporate investment.

Sen. Obama feels that the United States must compete far more effectively against an array of international rivals who are growing more technically adept. Obama looks to the federal government to finance science, math and engineering education and the kind of basic research that can produce valuable industrial spinoffs, report William J. Broad and Cornelia Dean for The New York Times.

• Technology Select Sector SPDR (XLK)

Jackie Calms for The Wall Street Journal reports that there are two anecdotes for the economic crisis. McCain claims he will help create more jobs in America, present tax cuts to create more jobs and help protect life savings. Obama claims he will create five million new high-wage jobs simply by investing in alternative energy, and create two million more jobs by rebuilding infrastructure, starting with roads and schools.

Emily Brandon for US News & World Report reports that the “icing” on the economic packages proposed include Obama’s 90-day moratorium on foreclosures from banks that receive capital from the Federal government. McCain presents a $300 billion plan for government to purchase unaffordable mortgages from troubled borrowers and exchange them for less-expensive fixed-rate loans backed by the Federal Housing Administration.

• SPDR Homebuilders (XHB)

If Sen. McCain or Sen. Obama lives up to even part of his agenda, it will make a difference not only to your tax bill next year but also to your family’s long-term financial security, reports Pat Regnier for CNN Money.

Whether you’re talking about financial market regulation, income taxes, retirement savings or paying for health care coverage, Obama is much more likely to have the federal government intervene in the name of “American families”. McCain, on the other hand, puts more faith in the marketplace and both individual and corporate enterprise.

• iShares Dow Jones US Financial Sector Index Fund (IYF)

Despite the worsening economic picture, though, neither candidate has signaled any intention to scale back his plans. And the head of the Senate Finance Committee, which would have a big say in just about everything the next president hopes to accomplish on health care, says he won’t let the current financial crisis stop the committee from tackling it. Both McCain and Obama have big-ticket ideas about health care reform and how to obtain it, reports Kevin Freking for Associated Press.

While both Obama and McCain propose overall cuts, is there any specifics that are guaranteed? Some analysts suggest that investing in muni-bond ETFs is an attractive option, as big federal budget deficits are looming and expected to grow, reports The Wall Street Journal.

• PowerShares Insured National Municipal Bond Portfolio (PZA)

In reference to McCain’s housing proposal, experts are skeptical, as the toxic loans have been sliced and diced so much they are hard to re-package. Julie Hirschfiled Davis for Associated Press says even if the government did gain access to the mortgages, it would have to pay far more than they would ever be worth, housing specialists said Wednesday.

As the election day nears, both candidates have done their best to put out proposals that address the specific economic problems that appear most dire to them.

States and cities are selling off around $6 billion worth of debt this week. For example, Houston is selling $423 million and New York City will sell $400 million, among others, reports Scott Jagow for Marketplace. And there are going to be plenty of buyers.

This may be the strongest rally for muni bonds in history and this is great news if you want to get in on the market. Just a month ago, no one wanted to lend money, especially not to cities and states, driving yields up and prices down.

The rally began on Oct. 15 and is continuing well into this week, and many of the buyers appear to be individual investors pulled in by the high-yielding, mostly tax-free bonds.

Both types of investors are on the hunt for yields higher than what Treasury bonds currently offer, leading to a $5 billion long-term bond issuance by state and local governments in New York, says Jeremy R. Cook for Bloomberg.

Right now, the 10-year Treasury yields 3.85%, while the 10-year muni yields 6.47%. Muni bond sales this year through early September rivaled 2007’s record pace. After the most recent turmoil oin the markets, overall issuance this year has been down nearly 9% through last week.

There are a number of muni-bond ETFs to watch, including:

• PowerShares Insured National Muni Bond (PZA): down 12.8% year-to-date; yield 4.95%

• Market Vectors Intermediate Muni (ITM): down 6% year-to-date; yield 3.74%

• iShares S&P National Municipal Bond (MUB): down 3.3% year-to-date; yield 3.52%

Treasuries advanced on Tuesday, pushing yields down, as concerns about the health of the banking system here pulled investors back to the safety of government debt, reports Deborah Levine for MarketWatch. It didn’t help that this morning, concerns arose over the ability of Lehman Brothers (LEH) to raise capital.

Traders are noting that Treasurys still face pressure, as the government may have to issue more debt in the coming quarters to support the mortgage agencies.

Some Treasury bond ETFs include:

• iShares Lehman TIPS Bond (TIP), up 5.2% year-to-date
• iShares Lehman 20+ Year Treasury Bond (TLT), up 7.1% year-to-date

Municipal bonds and the ETFs that focus on them are one of the most popular and interesting investments for 2008. Eileen Ambrose for The Baltimore Sun explains that investors in high-income tax brackets favor the bonds because the interest income generated is exempt from federal taxes and, in some cases, state taxes. Investors also flock to municipal bonds for safety.

Bond insurance is now an issue, as this is what guarantees the interest payments and principle on bonds in case of default. Muni-bond insurers in recent years have gone and started insuring riskier securities that involve the subprime mortgages. You can guess where that led, and now issuers are offering a higher rate on bonds to attract investors. Lucky for some investors, bond yields are up.

ETFs offer good access to municipal bonds, as they track a benchmark of bonds and they can be broken up and traded through out the day. Some of the many available municipal bond ETFs are:

• SPDR Lehman Municipal Bond ETF (TFI), up 2.1% year-to-date
• PowerShares Insured National Municipal Bond Portfolio (PZA), down 1.4% year-to-date
• iShares S&P National Municipal Bond Fund (MUB), up 1.9% year-to-date