ETFs Without the Tax Hit for Fixed Income Investors | ETF Trends

With 2021 about a month and a half away, it’s not to early to start talking about fixed income taxes, or even better, not paying them. Bonds have had an incredible run this year amid a pandemic-ridden 2020, but ETF investors seeking to minimize taxable income exposure might want to graduate to municipal bonds with the VanEck Vectors Intermediate Muni ETF (ITM).

ITM seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Bloomberg Barclays AMT-Free Intermediate Continuous Municipal Index (LMT2TR), which is intended to track the overall performance of the U.S. dollar denominated intermediate-term tax-exempt bond market.

ITM gives investors:

  • Tax Exempt Income: Income generally exempt from federal taxes and the Alternative Minimum Tax (AMT)
  • Targeted Interest Rate Risk: Designed to track an index of intermediate-duration municipal bonds
  • Quality: Investment-grade index constituents with high overall credit quality

ITM Chart

With municipal bonds, investors get a lower risk of default on debt. Furthermore, a Biden-Harris administration installed in the White House could benefit municipal bonds as higher proposed taxes could be funneled into more government-fueled projects, such as infrastructure–something that needs municipal bonds for financing.

It’s not as exciting as some other investments like robots or artificial intelligence, but it works in this COVID-19 economy.

“Municipal bonds fund the construction of roads, sewage systems, school buildings and power grids,” a Marketplace article said. “Muni bonds aren’t exactly the sexiest things in the world. But right now, in this pandemic economy, they’re having a moment in the sun.”

“The vast majority of municipal bonds also have a unique feature: The interest they pay is exempt from taxes,” the article added. “That appeals to wealthy individual investors who buy the majority of muni bonds and have been saving more money during the pandemic, said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott.”

“They’re also higher-end taxpayers, and so they have more to benefit, on average, from the tax exemption,” Scott said.

ITM comes with an expense ratio of 0.24% and has enjoyed a year-to-date gain of about 4%.

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