With the equities market seesawing again, investors may want to revisit fixed-income assets like municipal bond exchange traded funds for a more conservative play.
Broad muni bond ETFs provide diverse exposure to a pool of municipal debt. For instance, the iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB), the largest muni ETF option, has a 6.31 year duration and a 1.59% 30-day SEC yield, or 2.8% taxable equivalent 30-day SEC yield for those in the highest income bracket.
Additionally, investors who are worried about rising interest rates can utilize a short-term bond ETF, like Market Vectors-Short Municipal ETF (NYSEArca: SMB). SMB has a shorter 3.07 duration – duration is a measure of a bond fund’s sensitivity to changes in interest rates, so a lower duration reflects a smaller sensitivity or price drop in case interest rates rise. The fund also has a 1.01 30-day SEC yield, or a taxable equivalent 30-day SEC yield of 1.68% for those in the highest income bracket.
Potential investors may notice that munis come with yields that are slightly lower than fixed-income funds with similar durations. For example, the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) has a 7.73 year duration and a 1.85% 30-day SEC yield. The lower muni yields are generally lower than their taxable counterparts due to the federal tax perks. Consequently, investors would typically calculate a muni fund’s tax-equivalent yield for their income bracket to get a comparable yield to other bond funds.
Tax free municipal bonds may not be the most interesting investment theme, but they provide an investor’s portfolio with a safer play during market swings, writes Dan Moskowitz for Investopedia.