Fixed-income investors seeking to diversify their holdings can look to municipal bonds and related exchange traded funds for their attractive yields, especially in a taxable investment portfolio.
On the recent webcast, Goundhog Day: Will the Muni Market See Its Shadow in 2016?, Ashton P. Goodfield, Co-Head of the Municipal Bond Department and Portfolio Manager for Municipal Bond Mutual Funds at Deutsche Asset Management, noted that tax changes in 2013 lifted the top tax bracket to 39.6% in federal and 3.8% on investment income.
However, municipal bonds are exempt from both of these tax impediments on returns. For instance, Goodfield calculates that a 3.00% muni yield in 2012 equated to a taxable equivalent yield of 4.62%, but with a higher tax rate now, a 3.00% yield would show a taxable equivalent 5.30% yield for those in the highest income bracket.
“Higher taxes make the municipal bond exemption more valuable,” Goodfield said.
Matthew Forester, Chief Investment Officer of NewSquare Capital, also pointed out with higher taxes, demand is increasing for these tax-exempt investments.
“Higher rates drive millions of households into a need for tax-exempt income,” Forester said.
Goodfield also argues that municipal debt can offer attractive diversification benefits as well. Investors may find that their muni positions may zig as other investments zag, which will helps diminish a portfolio’s overall volatility.
“Municipal bonds have historically offered low correlations to both equities and other areas of fixed income,” Goodfield added.