To combat low yields, fixed income investors can opt for taxable municipal bonds via ETFs like the Invesco Taxable Municipal Bond ETF (BAB).

Getting taxable municipal bonds might seem counterintuitive given that one of the main reasons investors gravitate to munis is because of their tax advantages. However, investors can also get higher yield in lieu of these tax benefits.

BAB Chart

BAB seeks to track the investment results of the ICE BofAML US Taxable Municipal Securities Plus Index. The fund generally will invest at least 80% of its total assets in securities that comprise the index. ICE Data Indices, LLC, oversees the underlying index, which is designed 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.

“Unlike most municipal bonds, Build America Bonds are taxable securities, eliminating one of the advantages that has traditionally allowed municipalities to issue debt at lower rates than otherwise comparable corporate debt,” an ETF Database analysis explained. “BAB invests primarily in investment grade debts, giving investors safety during unstable markets, and with an average coupon rate above 5%, the ETF will also offer an attractive yield.”

Get The Yield Fixed Income Investors Crave With

A Tax-Free Option

For bond investors who are seeking the tax-free aspect of municipal bonds, there’s the Invesco National AMT-Free Municipal Bond ETF (PZA). PZA seeks to track the investment results of the ICE BofAML National Long-Term Core Plus Municipal Securities Index, which is composed of U.S. dollar-denominated, tax-exempt municipal debt publicly issued by U.S. states and territories and their political subdivisions in the U.S. domestic market.

“Muni bonds are used by local entities to pay for a variety of services or to make improvements to infrastructure paying for everything from new sewer systems to school renovations and bridge construction as such, they are relatively low risk instruments,” an ETF Database analysis explained. “This is especially true in the case of PZA since the fund only targets munis that are insured or in other words, have bought insurance from a private company that will pay out if the underlying bond defaults.”

“As a result PZA is a solid choice for investors seeking broad exposure to the muni market but with much lower levels of risk; allowing investors the safety of an insured product but with the tax advantages of the muni sector,” the analysis added.

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