Municipal Bonds Have Weathered Inflation Storm the Best | ETF Trends

Municipal bonds have been one of the bright spots in a bond market that’s been battered and bruised by rising interest rates. Munis have been offering investors an attractive mix of yield and credit quality.

“This is because municipal bond funds continue to see outflows – not as vigorous as last June’s but still heavy,” said John R. Mousseau, CFA, president, chief executive officer, and director of fixed income at Cumberland Advisors. “We have recently started to see 5% yields on some long bonds in muni bond deals. You have to go back to the taper tantrum of 2013 to see that. And at that level it represents a 1.35 yield ratio to treasuries as well as almost an 8% taxable equivalent.”

“We think that is a heck of a bargain,” Mousseau confirmed.

Broad Muni Exposure in 1 ETF

As opposed to holding various municipal bonds, exchange traded funds (ETFs) offer an all-inclusive approach. They include various debt holdings in one position at a low cost.

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 0.05% expense ratio, the fund offers low-cost exposure to municipal debt, while also offering a 3.8% 30-day SEC yield as of October 25.

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).

Another Option: Going Long

With the expectation that the U.S. Federal Reserve could potentially scale back on rate hiking measures, long bonds are seeing interest again. With an eye on yield, fixed income investors can extract more albeit accepting more rate risk, which may be dissipating.

As such, consider the Vanguard Long-Term Treasury Index Fund ETF Shares (VGLT). The fund seeks to track the performance of a market-weighted Treasury index with a long-term dollar-weighted average maturity, and employs an indexing investment approach designed to track the performance of the Bloomberg U.S. Long Treasury Bond Index.

This index includes fixed income securities issued by the U.S. Treasury (not including inflation-protected bonds) with maturities greater than 10 years. The fund comes with a low 0.04% expense ratio and a 30-day SEC yield of 4.4% as of October 25.

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