3 ETFs to Consider as Fed Steps in to Save Municipal Bonds

It almost seems like “safe haven bonds” has become a misnomer. Some of the safest debt, such as municipal bonds, are now causing its issuers to ask for help from the Federal Reserve amid the coronavirus outbreak, and it looks like their pleas will be answered.

“Under the $2tn stimulus law enacted late last month, the US central bank has committed to developing a program to help local and regional governments struggling to manage the coronavirus outbreak and the economic damage it has caused,” a Financial Times report noted. “The aid could include lending cash to municipalities, especially to help school districts or other issuers that rely on one-time tax payments. As part of that effort, the Fed has also promised to find ways to steady the muni bond market, which has seen some extreme price swings since late February.

“But as yet, there have been few details on this unprecedented Fed incursion, and little clarity on what the central bank will consider buying and how much credit risk it is willing to take on,” the report added further. “The uncertainty has rippled through the normally staid muni market, with yields on debt maturing in 10 years remaining elevated and investors continuing to yank cash from muni bond funds, according to Lipper.”

With the Fed ready to extend an olive branch, here are a few funds to consider:

  • VanEck Vectors AMT-Free Long Municipal Index ETF (BATS: MLN): seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Bloomberg Barclays AMT-Free Long Continuous Municipal Index. The index is comprised of publicly traded municipal bonds that cover the U.S. dollar-denominated long-term tax-exempt bond market.
  • Xtrackers Municipal Infrastructure Revenue Bond ETF (NYSEArca: RVNU): seeks investment results that correspond generally to the performance, before fees and expenses, of the Solactive Municipal Infrastructure Revenue Bond Index. The fund will invest at least 80% of its total assets (but typically far more) in instruments that comprise the underlying index. The underlying index is comprised of tax-exempt municipal securities issued by states, cities, counties, districts, their respective agencies, and other tax-exempt issuers.
  • Franklin Liberty Municipal Bond ETF (NYSEArca: FLMB):  seeks a high level of current income that is exempt from federal income taxes. Although the fund tries to invest all of its assets in tax-free securities, it is possible that up to 20% of the fund’s net assets may be in securities that pay interest that may be subject to the federal alternative minimum tax and, although not anticipated, in securities that pay interest subject to other federal or state income taxes.

Looking for Yield?

For fixed income investors seeking yield, they can look to the Principal Active Income ETF (YLD). YLD is an actively managed fund that seeks to achieve its investment objective by investing its assets in investment grade and non-investment grade fixed income securities and in equity securities. The fund’s Sub-Advisors, actively and tactically allocates the fund’s assets among fixed income securities and equity securities in an effort to take advantage of changing economic conditions that the Advisor believes favors one asset class over another.

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