The Case for Municipal Bond BulletShares

Municipal bonds have been praised for their stable nature, but even more stabilization should lead fixed income investors to consider Invesco’s BulletShares municipal bond ETFs.

Overall, munis give investors exposure to a bond market that historically has low default rates. While a company can fold, local government typically won’t do so. The safety of investing in debt paid for by taxpayers adds an extra layer of assurance.

BulletShares ETFs in the municipal bond space come with a variety of maturity dates depending on the investor’s preference and its use in their respective portfolios. Depending on the maturity date, the ETF is based on the Invesco BulletShares® USD Municipal Bond (2021 to 2030) Index.

The fund will invest at least 80% of its total assets in municipal bonds that comprise the index. The index seeks to measure the performance of a portfolio of US dollar-denominated debt issued by states, state agencies, or local governments.

With that shorter duration bonds, fixed income investors are less exposed to changes in interest rates. With longer duration bonds, investors can extract more yield, but take on more rate risk.

“Municipal bonds have always been an attractive fixed income asset class thanks to their tax-advantaged status and government safety net – especially for investors that fall into higher tax brackets,” a article explained. “These benefits have become even more pronounced with potential capital gains tax increases for high earners and rising inflation.”

Renewed Stabilization Amid Recovery

As mentioned, default rates for municipal bonds are comparatively less than other types of debt, such as corporate or high-yield bonds. Amid an economic recovery following last year’s pandemic, municipal bonds have become even more stable.

“Moody’s Investors Service raised its outlook for state and local governments to ‘stable” from “negative’ after the $1.9 trillion pandemic relief bill passed in March, saying that the funds would stabilize state finances and help avoid local government funding cuts,” the article said. “The upgrade helped draw many investors back into muni bonds after the sell-off.”

“State governments have also been able to raise billions of dollars on highly favorable terms in recent months,” the article added. “For example, Illinois saved millions of dollars when it borrowed $1.26 billion in mid-March, paying just 1.09% compared to 3.42% on comparable bonds. These sales have helped increase supply, while refinancing has improved credit ratings.”

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