In the face of election year volatility and speculation about the Federal Reserve’s plans for interest rates, municipal bond ETFs faced some headwinds last year.
The iShares S&P National AMT-Free Muni Bond ETF (NYSEArca: MUB), the largest municipal bond ETF, notched a modest decline last year.
Some bond market analysts and participants are concerned about the impact a Trump presidency will have on municipal bonds. Prior to the Fed raising interest rates for the only time last year in December, income investors widely embraced muni ETFs. However, the Fed is targeting three rate hikes for 2017, a scenario that could pressure fixed income assets.
“The devastation of municipal bond prices following the U.S. presidential election has created opportunities as the yields of non-callable, investment grade, tax-exempt municipal bonds have risen to a point where they cannot be ignored,” said S&P Dow Jones Indices in a recent note.
Since muni bond interest is exempt from federal taxes, muni ETFs are a good way for investors seeking tax-exempt income, especially those in higher tax brackets. Due to its tax-exempt status, the asset category is also best utilized in taxable accounts. The tax-exempt status also creates high demand for municipal bonds. Consequently, the perceived bond yields are typically lower than their taxable counterparts.