In the current bond market environment, low yields are causing high-income investors to look in other areas for yield. One place to look that also offers distinct tax advantages is the municipal bond market.
“Owning a municipal bond fund is a superb way to receive income free of federal tax obligations,” wrote Barbara Friedberg in InvestorPlace. “And if you buy a fund that owns bonds from your state of residence, you’ll also enjoy freedom from state taxes.”
“A municipal or muni bond fund is a mutual or exchange-traded fund that owns debt securities issued by a state, municipality or county,” Friedberg added. “These securities are akin to loans issued to secure funding for projects within the region that will benefit the public — things like funding bridges, highways or schools. When you buy a muni bond fund, you’re lending money to the issuer in exchange for regular dividend payments. Unlike corporate bond income, municipal bond dividends are federal tax-free. If the bonds fund projects within your state, the income will also be free of state taxes.”
If investors haven’t already been allocating a portion of their fixed income portfolio to municipal bonds, now is the time to get that necessary exposure via ETFs. A Visual Capitalist investment case cited the following reasons for municipal bonds:
- Historical yield paired with strong returns
- High-quality credit ratings
- Inefficient pricing, which could create value opportunities
- Low correlations to other assets
- Longer durations
For high-income earners, InvestorPlace offered a pair of municipal bond ETFs to consider:
- iShares National Muni Bond ETF (NYSEArca: MUB): seeks to track the investment results of the S&P National AMT-Free Municipal Bond IndexTM. The fund generally will invest at least 90% of its assets in the component securities of the underlying index and may invest up to 10% of its assets in certain futures, options and swap contracts, cash and cash equivalents. The index measures the performance of the investment-grade segment of the U.S. municipal bond market.
- SPDR Nuveen Bloomberg Barclays Short Term Municipal Bond ETF (NYSEArca: SHM): seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the Bloomberg Barclays Managed Money Municipal Short Term Index. The fund invests substantially all, but at least 80%, of its total assets in the securities comprising the index and in securities that the Sub-Adviser determines have economic characteristics that are substantially identical to the economic characteristics of the securities that comprise the index. The index tracks the short term tax exempt municipal bond market and provides income that is exempt from federal income taxes.
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