Fixed-income investors may be paying more than necessary when purchasing individual municipal debt securities. On the other hand, people can use munis exchange traded funds for a cheap way to access the market.
Three U.S. regulators have began scrutinizing municipal bond markup fees that could cut into investor returns, reports Aaron Kuriloff for the Wall Street Journal.
The markup shows the difference between a muni debt security’s current offering price among dealers and the higher price a dealer charges a customer. The markup typically occurs when a dealer acts as a principal who buys and sells from a personal account as opposed to brokers who facilitate trades for a nominal fee.
As an alternative, Allan Roth, founder of Wealth Logic, believes that investors should use low-fee bond funds instead, arguing that markups the funds pay are smaller since ETF providers purchase in bulk and are more acquainted with the market. Additionally, Roth points out that muni funds can instantly help investors diversify through one single investment since the bond funds hold hundreds if not thousands of individual debt securities.
For instance, the iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB) has a 0.25% expense ratio and includes 2,470 component holdings. The SPDR Nuveen Barclays Municipal Bond ETF (NYSEArca: TFI) has a 0.23% expense ratio and 535 holdings. The Market Vectors Intermediate Municipal Index ETF (NYSEArca: ITM) has a 0.24% expense ratio and 985 components.
“Even if I have $5 million to buy municipal bonds, I really can’t diversify enough by buying individual bonds,” Roth said in the article. “And if I have $500,000, then I really can’t diversify.”