Minnesota shutting down over the holiday weekend and New Jersey requiring a loan to cover a cash shortfall are recent and painful reminders of states’ fiscal woes.
However, an exchange traded fund strategist is recommending investors overweight municipal bond ETFs in their portfolios relative to Treasuries.
The iShares S&P National AMT-Free Muni Bond Fund (NYSEArca: MUB) was up 5.3% for the year-to-date period ended July 1, according to Morningstar, to outperform Treasuries and high-yield bonds.
“While we continue to maintain a view that investors should overweight equities over bonds, within the fixed-income space we continue to advocate overweighting national munis,” says Russ Koesterich, iShares Global Chief Investment Strategist at ETF manager BlackRock.
“First … while the states certainly have their own fiscal challenges, revenues are improving,” he wrote at the iShares blog. “By and large, the term structure for most municipalities – in other words the timing of their funding needs – also looks better than that for the federal government.”
Treasury ETFs were higher Tuesday afternoon on debt jitters focused on Europe and China following last week’s rout. [Treasury ETFs Climb]
ETFs that invest in municipal bonds have bounced back somewhat after plunging in late 2010 when a noted analyst predicted massive defaults. [State Deficits May Rattle Muni Bond ETFs]
Despite their recent outperformance, munis “still appear cheap relative to Treasuries,” said BlackRock’s Koesterich, citing valuations on 10-year bonds.
The discount “looks even more compelling when you consider the amount of supply the U.S. Treasury needs to sell over the coming year due to chronic deficits,” the strategist added. Finally, muni bonds could be more attractive to upper income investors due to tax breaks, he said.
In May, Koesterich said the U.S. Treasury market offered “little value” and advised an underweight position in long-term Treasury ETFs. [Treasury ETFs Caught Between Debt Worries, Safety Trade]
iShares S&P National AMT-Free Muni Bond Fund
iShares Barclays 20+ Year Treasury Bond Fund (NYSEArca: TLT)
