Municipal bond exchange traded funds have been among the best performing fixed-income assets this year. For those who are thinking about a shift over to munis now, there are some factors to considers.
The robust returns has attracted a lot of attention, and investors who are thinking about including some munis exposure should also keep in mind that munis benefit some more than others, the asset class is not risk free, some may offer local tax perks, and munis are growing less attractive, writes Ian Salisbury for TIME.
Specifically, investors in a higher tax bracket will benefit more from the federal tax-exempt status on munis’ interest payments.
For instance, MUB comes with a 1.56% 30-day SEC yield, but for those in the highest income bracket, the tax equivalent yield is 2.76%. ITM has a 2.04% 30-day SEC yield. According to Market Vectors, ITM has a 2.40% yield for those in the federal tax rate of 15%, and the taxable equivalent yield rises to 3.38% for those in the federal tax rate of 39.6%. The taxable equivalent yield is equal to the tax-free municipal bond yield divided by the 1 minus your tax rate.
Munis also come with credit risks. As some investors may remember the hoopla with Detroit and Puerto Rico, there are default risks. While the municipal bond ETFs track investment-grade municipal debt securities, there is always the risk of an outlier. [Elections Could Rattle Muni Bond ETFs]