Municipal bond exchange traded funds may not be the most exciting investment, but they have been maintained their momentum in 2016, providing investors with steady and stable returns.
Fixed-income investors should take a second look at municipal bonds as they begin to fall behind Treasury bonds.
“While tax-exempt munis have lagged strong-performing Treasuries so far in 2016, that relative weakness could offer investors a compelling entry point — an opportunity to buy in at a lower valuation and capture the potential income advantage that the tax-exempt asset class has to offer,” according to Peter Hayes, Head of BlackRock Municipal Bonds Group.
Specifically, Hayes points to three factors that have fallen under the radar but still support the muni outlook, including attractive yields, high quality and diversification.
For starters, munis offer yield generation and provide investors an attractive level of income relative to other fixed-income assets in what will likely be a prolonged low-yield environment.
The municipal market also comes with high quality and low volatility traits. The asset category has experienced lower volatility than other bond categories and tends to be less affected by Federal Reserve rate uncertainty than high-quality taxable investments, like Treasuries. Moreover, credit risk remains low among the munis group, with 10-year cumulative default rates at 0.24% for municipal bonds, compared to 11.16% for corporates.