Getting higher yield can certainly come at a cost, especially given the prospects of higher tax rates, which is where exposure to tax-free municipal bonds can help.
Municipal bond exposure heightened this year with the introduction of the trillion-dollar infrastructure bill that’s currently pending approval in the House of Representatives. Now the expectation is that the bill will pass, which should boost municipal bonds with additional infrastructure spending debt.
“We’re going to pass those two bills you’ve been hearing about. We’re going to pass them. The vote’s been called for Tuesday. We’re gonna take this vote, and we’re going to pass them,” House Majority Whip James Clyburn, D-S.C., said over the weekend.
The infrastructure bill will include $110 billion allocated towards building new roads and bridges. Additionally, $39 billion will go to updating the public transportation system.
All this translates to more bond issuance by local governments, which means that fixed income investors will have their fair share of options to choose from in a vast muni debt market.
“We hope to see municipalities leverage the infrastructure bill — they will probably have to issue more bonds to match some of the funding from the federal level,” said municipal bond underwriting expert Suzanne Shank, who is also chairwoman, CEO, and a co-founder of Siebert Cisneros Shank & Co., LLC.
“So we think overall, it will be very positive to supply and obviously make our municipalities stronger going forward,” Shank 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).
“Vanguard provides us with some very critical factors when evaluating a bond fund. With over 6000 bonds, individual bond risk is basically non-existent. This is also reflected in that the Top 50 holdings are only 13% of the ETF,” a Seeking Alpha article by Retired Investor noted.
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