Municipal bond ETFs are strong performers in 2012 and have enjoyed an added tailwind following President Barack Obama’s re-election on expectations investors will see higher taxes.
ETFs such as iShares S&P National AMT-Free Municipal Bond Fund (NYSEArca: MUB) surged in the wake of the elections as analysts pinned the move on investors rushing into tax-exempt munis.
Some high-profile investors such as Bill Gross, manager of PIMCO Total Return ETF (NYSEArca: BOND), have been loading up on municipal debt on expectations taxes will rise following Obama’s re-election. “Muni bonds, which are tax-free, would be a valuable type of asset going forward,” Gross said in a recent report.
“One way or another it’s pretty likely that tax rates will go up, especially for those in the higher income brackets. That will make it better to have more investments for assets where the interest income is exempt from federal income taxes,” writes Deborah Levine at MarketWatch. “The exemption is usually considered to be worth more if you’re in one of the higher brackets.”
Their popularity this year has pushed municipal-bond yields to their lowest in decades, she adds. [Muni Bond ETFs at Crossroads After Hurricane Sandy]
However, from a tax standpoint, there is a different story that could have negative consequences for muni bond ETFs.
“Some proposals being informally floated call for a reduction in the tax benefit on these securities from 35% to 28%; others would limit the universe of entities eligible to issue tax-exempt debt in a move to boost government revenue. That has some investors concerned about the immediate future of this asset class,” reports ETFdb’s Michael Johnston at Forbes.
Yet while changing the tax policy that applies to munis has been discussed in the past, each time it has induced major pushback from municipal investors and issuers, said Matt Tucker, head of fixed-income strategy at BlackRock’s (NYSE: BLK) iShares.
“While any such change would obviously have an impact on the markets, we do not believe significant tax overhaul that would change municipal bonds’ tax-exempt status is likely to happen,” BlackRock analysts added. “In our view, there is too much support of the current exemptions to allow for drastic changes.” [Muni Bond ETFs Hit]
iShares S&P National AMT-Free Municipal Bond Fund
Full disclosure: Tom Lydon’s clients own BOND.