“If the plan in President Trump’s new tax proposal to eliminate the deductibility of state and local taxes from Federal income tax actually becomes law (still a big “if”), municipal bonds could benefit.
Interest income from municipal bonds are still tax-free, according to the Trump administrations tax reform plans outlined Wednesday,” reports Amey Stone for Barron’s.
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.
The VanEck Vectors High Yield Municipal Index ETF (NYSEArca: HYD) and SPDR Nuveen S&P High Yield Municipal Bond ETF (NYSEArca: HYMB) can be used for investors looking for some extra yield in their muni ETF allocations.
“Muni prices could get dampened due to the proposal to drop the top tax rate, which in theory should make munis less attractive to high-net worth investors. But even if the tax-equivalent yield falls a bit, munis are still more attractive than other fixed-income options, analysts from Goldman Sachs wrote earlier this month,” according to Barron’s.
For more information on the munis market, visit our municipal bonds category.