While the stock market has been on a tear over the last week or so, some investors are still understandably reluctant to jump back into the market. For those investors with a more conservative bent, seeking more capital preservation and less growth at this point, municipal bonds and their associated ETFs might be a good place to park funds.
If your primary investing objective is to preserve capital while generating a tax-free income stream, municipal bonds are worth contemplating. Municipal bonds, also known simply as munis, are debt obligations issued by government entities. Like other forms of debt, when you purchase a municipal bond, you are loaning money to the issuer in exchange for a set number of interest payments over a predetermined period of time. At the end of that period, the bond reaches its maturity date, and the full amount of your original investment is returned to you.
The two main types of municipal bonds are general obligation bonds (GO) and revenue bonds. GO bonds are issued to raise instant capital to cover expenses, and are backed by the taxing power of the issuer. Revenue bonds, on the other hand, are issued to fund infrastructure projects, and are supported by the income generated by those projects. Both types of bonds are tax-exempt and particularly attractive to risk-averse investors due to the high likelihood that the issuers will repay their debts.
One ETF that offers investors the opportunity for bond income is the iShares National Muni Bond ETF (MUB), which seeks to track the investment results of an index composed of investment-grade U.S. municipal bonds. The fund provides investors with exposure to a broad range of nearly 4,000 U.S. municipal bonds, and follows the S&P National AMT-Free Municipal Bond Index as it’s benchmark. The ETF has a very low 0.07% expense ratio, offering investors the chance to capture most of the profit.
While the market has performed well recently, there is still uncertainty as to whether this June recovery is sustainable, or if it is just a bounce. Investors looking for safety might find MUB to be a less risky way to make income while they observe the transitioning trade war and global economic developments.
For more fixed income ETF ideas, visit our Fixed Income Channel.