As Municipal Bonds Draw More Interest, Consider These ETFs

With the expectation that the U.S. Federal Reserve will taper interest rate hikes in the second half of 2023, fixed income investors are turning to more yield. They may find what they’re looking for in municipal bonds.

Not only do munis offer yield, they provide fixed income investors with a tax-free option to pair low default rates in local government debt.

“When a money-market fund yields more than 5%, what’s so special about municipal bonds yielding 3%? A lot, it turns out,” Barron’s noted. “Take taxes into account and muni yields get much more appealing.”

For an all-encompassing approach to getting muni exposure, investors can consider the Invesco Taxable Municipal Bond ETF (BAB), which seeks to track the investment results of the ICE BofAML US Taxable Municipal Securities Plus Index. The index aims to measure the performance of U.S. dollar-denominated taxable municipal debt publicly issued by U.S. states and territories and their political subdivisions in the U.S. market.

As of July 28, BAB’s 30-day SEC unsubsidized yield stands at 5.01%, while its 12-month distribution rate is 3.57%. The fund is deeply diversified, with over 700 holdings in its portfolio, giving investors extensive variety to supplement their current bond portfolio with muni exposure.

Bond Laddering Options

While BAB offers a compelling option for an all-encompassing approach, investors may want to utilize a bond laddering strategy that employs bond exposure using various maturity dates. This strategy isn’t relegated to individual bonds; it also extends to ETFs. Invesco offers a product suite of ETFs catering to municipal bonds specifically via its BulletShares lineup.

“While extending duration today can help capitalize on the interest-rate cycle’s next phase, there’s no all-weather strategy to reach a duration target,” AllianceBernstein noted in a municipal bond report. “A laddered or bulleted approach to maturities works well in certain yield-curve environments. But with today’s inverted yield curve—when short-term yields are higher than those for longer-term bonds—a barbell approach that pairs both short and longer issues may lead to better investment outcomes as the yield curve moves toward a more normal upward slope.”

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