Do municipal bond exchange traded funds (ETFs) have a place within your portfolio?

Fund companies have been churning out these new types of ETFs over the past year, and if you believe tax rates are going to go up, then these ETFs may look even more attractive, says Eleanor Laise for The Wall Street Journal.

The troubled times have actually weighed these funds down, with the credit crunch and mortgage meltdown in full effect. The bonds are so bogged down, they may actually be a good buy now, some say.

While muni-bond funds do have many tax advantages, their yields are lower than those of U.S. Treasury bonds. Municipal bonds are issued by state and local governments, and often times are exempt from federal, state and local income tax.

As of now, safety-minded investors have fled toward the Treasury bond ETFs, and this has actually driven the prices up and the yields down. The rseult has been that they’re now about equal with the muni-bond. Muni-bond ETFs have low costs and the average expense ratio is at 1.01% of assets. Investors who believe tax rates are going to go up have a reason to consider the bonds.

Laise recommends the calculator at Investing In Bonds – you can enter your state, net taxable income and tax-filing status to see the yield you need to earn on a taxable security to match the tax-free yield of a muni bond.

Some to choose from:

  • iShares S&P National Municipal Bond Fund (MUB), up 0.6% year-to-date
  • PowerShares Insured National Municipal Bond Portfolio (PZA), down 3.1% year-to-date
  • SPDR Lehman Brothers Municipal Bond (TFI), up 0.7% year-to-date
  • Market Vectors-Lehman Brothers AMT-Free Short Municipal Index (SMB), up 2.2% since Feb. 28 inception

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.