Investors in retirement often look to steady income streams with low risk and municipal bonds and the related ETFs can help investors accomplish that objective.
One idea to consider is the Vanguard Tax-Exempt Bond ETF (NYSEArca: VTEB), which carries an expense ratio of 0.06% per year, or $6 on a $10,000 investment, making it one of the most cost-effective funds in this category.
“Income from municipal bonds, which are issued by state, city, and local governments, is generally free from federal taxes,” according to Vanguard. “Because they offer this special tax treatment, these bonds generally give you lower interest rates than comparable taxable bonds. So like tax-managed funds, they make the most sense for investors in higher tax brackets.”
Munis also help diversify fixed-income portfolios. Investors who typically follow the Barclays U.S. Aggregate Bond Index will not have municipal bond exposure, so a muni bond ETF can complement core fixed-income positions.
In the current market environment, VTEB’s combination of a decent yield relative to Treasuries and low credit risk is appealing.
“VTEB, which tracks the S&P National AMT-Free Municipal Bond Index, holds 4,414 bonds with an average duration of 5.2 years, putting it in intermediate-term territory,” according to InvestorPlace. “Over 77% of those holdings carry credit ratings of AAA or AA, so credit risk is minimal with this Vanguard ETF. VTEB yields 2.22%, or more than double the yield on 10-year Treasuries.”
The Barclays U.S. Aggregate Bond Index, a widely observed fixed-income benchmark, along with other broad aggregate bond indices focus on U.S. Treasuries, mortgage-backed securities and investment-grade corporate debt but would exclude municipal debt, which have historically provided lower correlations to both equities and other fixed-income assets. Consequently, investors should look to a muni bond ETF to complement an existing core bond position.
Since municipal bond interest is exempt from federal taxes, muni ETFs are also a good way for investors to generate tax-exempt income, especially those in higher tax brackets. Because the debt category enjoys tax-exempt status, investors would maximize the benefits of muni exposure in taxable accounts.
With minimal volatility, VTEB is higher by almost 3.10% this year and by almost 7% over the past 12 months.
For on income strategies, visit our Retirement Income Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.