The election of Barack Obama to be the next president of the United States will help out certain exchange traded fund (ETF) sectors more than others. The municipal bond market could be one beneficiary, based on an analysis of their economic recovery proposals and interviews with market participants and economists.

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

Municipal Bond ETF

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.