Despite Rising Rates, Here's a Muni Bond ETF to Consider | ETF Trends

With the threat of higher taxes looming in 2022, investment capital poured into municipal bonds in 2021 despite the threat of higher interest rates.

With inflation running hot, the Federal Reserve could aggressively raise rates this year. Essentially, this should push yields higher and bond prices lower, but this is not the case for munis, according to some market experts.

“Higher interest rates will bode well for the average municipal bond investor,” said certified financial planner Jay Spector, partner at Barton Spector Wealth Strategies in Scottsdale, Arizona. “They’re potentially going to see higher coupon rates.”

2021 was already a strong year, and it’s going to be another busy year in 2022 for municipal bonds with record issuance. Those projections come after the trillion-dollar infrastructure package was signed into law last year, which should drive more state and local governments to issue more bonds to fund infrastructure projects.

“Governments will want to piggy back their own priorities onto projects being funded with federal dollars, and assuming the federal spending stabilizes or improves areas, it will encourage development, and development brings municipal bonds,” said Matt Fabian, a partner at Municipal Market Analytics, who estimates that 2022 will see an issuance between $450 and $475 billion.

As mentioned, driving demand for munis in 2021 was the expectation of higher taxes, especially since the trillion-dollar plan would add more federal government spending. Municipal bonds offer tax benefits when it comes to fixed income alternatives.

“Munis gives you that counterbalance to potential inflationary hikes in tax rates,” said Ian Weinberg, CFP and CEO of Family Wealth and Pension Management in Woodbury, New York.

Municipal bonds aren’t just for high net worth individuals, but every investor looking for ways to minimize the tax bite.

“I absolutely think that munis have a place in someone’s taxable portfolio,” Spector added.

Getting Municipal Bond Exposure

One place to get tax-free municipal bond exposure is via an ETF wrapper with funds like the Vanguard Tax-Exempt Bond ETF (VTEB). With a 0.06% expense ratio, the fund offers low-cost exposure to municipal debt.

VTEB tracks the Standard & Poor’s National AMT-Free Municipal Bond Index, which measures the performance of the investment-grade segment of the U.S. municipal bond market. This index includes municipal bonds from issuers that are primarily state or local governments or agencies whose interests are exempt from U.S. federal income taxes and the federal alternative minimum tax (AMT).

For more news, information, and strategy, visit the Fixed Income Channel.