Municipal bond exchange traded funds (ETFs) have taken a beating of late, but should you let that scare you off?
The iShares S&P National Municipal Bond ETF (NYSEArca: MUB) dropped 5.5% through the first two weeks of November, remarks Matthew D. McCall for IndexUniverse.
What happened?
- The Fed’s “QEII” program propped up bonds and put downward pressure on interest rates. However, the markets are showing that the exact opposite has occurred. [Muni ETFs Take a Beating; Time to Sell?]
- After the Republicans took over more seats in the House, the likelihood of extending Bush tax cuts has increased, which means that the tax-haven quality of muni bonds will no longer be necessary.
- Additionally, there are also rumors of an extension of the Build America Bond program, which, again, would steer investors away from munis.
Large state and local deficit are the biggest risk in muni bonds. If a state or city goes bankrupt, though, the federal government could potentially bail them out and the bonds would still make quarterly dividend payouts. Of course, there are no guarantees, so it’s important to always bear this risk in mind.
McCall believes that MUB and Market Vectors High-Yield Municipal Bond ETF (NYSEArca: HYD) will experience a snap-back rally in the coming weeks as investors come to see that U.S. states and cities aren’t going bankrupt.
Whatever you may believe about what’s happened recently in the municipal bond ETF space, check out the trend lines: many of them are below the long-term 200-day moving average, meaning that we may be in “wait-and-see” mode. Once they pop above that mark, though, check out your options in the ETF Analyzer if you believe munis are right for you.
For more information on muni bonds, visit our municipal bonds category.
Max Chen contributed to this article.
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.