Municipal bonds help diversify fixed-income portfolios. Investors who typically follow the Barclays U.S. Aggregate Bond Index will not have municipal bond exposure, so a muni bond ETF can complement core fixed-income positions.
Importantly, recent changes to U.S. tax laws do not diminish the allure of muni bonds for income investors. Options to consider among municipal bond ETFs include the VanEck Vectors AMT-Free Intermediate Municipal Index ETF (NYSEArca: ITM).
“Over the last seven years or so we have seen significant increases in the holdings of municipal bonds by both banks and insurance companies,” said VanEck in a research note. “Within the insurance industry itself, while bond purchases by property and casualty (“P&C”) companies have diminished, those by life insurers have increased. Although, with a reduction in the corporate tax rate to 21%, we may now see some reduction in demand from banks, whether the same holds true for life insurance companies remains to be seen.”
The $1.8 billion ITM, which is over a decade old, tracks the Bloomberg Barclays AMT-Free Intermediate Continuous Municipal Index. ITM holds over 3,400 municipal bonds and has a 30-day SEC yield of 2.27%.
Looking ahead, the muni market is entering a reinvestment season that could bolster the market, with three consecutive months of significant reinvestment demand generated by coupons, maturities and calls ahead.
Many muni investors feared that President Donald Trump’s big plans for an infrastructure revival would inundate the market with a new supply of municipal debt issuance.
Many were also concerned that Trump’s plans to lower income taxes would weaken the appeal of tax-exempt munis and that the president’s pro-growth agenda would push the Federal Reserve to hike interest rates sooner and faster.
“If history is anything to go by, tax reforms that have lowered personal taxes have led to no less interest in muni funds on the part of investors. Following the Tax Reform Act of 1986, signed into law by President Reagan on October 22 that year, investment in muni bonds by individuals did anything but fall,” according to VanEck.
For more information on the munis market, visit our municipal bonds category.