When it comes to municipal bonds, fixed income investors may tend to have a home bias or look at one bond and think they’re all the same. What they might find out when they actually put these bonds under a proverbial microscope is that they can differ from one bond to the next.
“Many investors look at municipal bonds and make the same mistake: They think they’re all the same—an investment option with tax-exempt income features, almost zero risk and the same low yield,” a Wall Street Journal article explained, making the case for investing outside of your home state. “Investors might be surprised to learn there can be large differences in munis, both in their coupon rates and in the returns of the mutual funds that invest in them. Currently, average returns for muni funds in some states can differ by as much as a full point, which over time can add up to a tidy sum.”
The article then went on to underscore the home bias that exists among fixed income investors looking at munis.
“Because people tend to only buy munis in their home states, taking advantage of the tax-free status that states confer on homegrown municipal issues, they often are unaware that such differences exist,” the article added. “But, contrary to popular belief, where the spreads are large, it can even be to an investor’s advantage to forgo the homegrown option for a fund that buys issues in another state.”
ETF investors looking for muni exposure can look to these funds:
- 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 correspond generally to the price and yield performance of the Bloomberg Barclays Managed Money Municipal Short Term Index. The fund invests most 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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