Municipal bond ETFs offer investors decent yield and a play on improving credit quality in debt issued by states and local governments.

“The Barclays Municipal Bond Index returned 3.43% year-to-date, with an average coupon of 4.90%,” says James Colby, portfolio manager and senior municipal strategist at Van Eck Global. “This generated enough return to help investors weather momentary downturns in market value.”

Van Eck oversees several muni bond ETFs, including Market Vectors High Yield Municipal Index ETF (NYSEArca: HYD). The fund has a 30-day SEC yield of 5.22%. [Muni Bond ETFs ss Alternative to Treasuries]

HYD generated a total year-to-date return of 9.9% as of June 13, according to investment researcher Morningstar.

“If you couple the average coupon of the Barclays Municipal Bond Index with the current spread of 216 basis points between the Barclays BAA Municipal Bond Index with the Barclays AAA Municipal Bond Index, an investor may have reason to believe that any economic improvement would result in the narrowing of this spread to its long-term mean of 121 basis points,” Colby wrote in a commentary this week.

“This would potentially generate 95 basis points of excess return,” he added. “However, without any improvement, the coupon alone generated nearly 5.00% to returns year-to-date. With today’s uncertain markets, I think investors might find this appealing.”

Other muni bond ETFs include:

  • iShares S&P National AMT-Free Municipal Bond Fund (NYSEArca: MUB)
  • PIMCO Intermediate Municipal Bond Strategy Fund (NYSEArca: MUNI)
  • SPDR Barclays Capital Short Term Municipal Bond ETF (NYSEArca: SHM)
  • SPDR Barclays Capital Municipal BondETF (NYSEArca: TFI)
  • Powershares Insured National Municipal Bond Portfolio ETF (NYSEArca: PZA)
  • iShares S&P Short Term National AMT-Free Municipal Bond ETF (NYSEArca: SUB)

Market Vectors High Yield Municipal Index ETF

The opinions and forecasts expressed herein are solely those of John Spence, 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.