When billionairebond manager Bill Gross speaks, investors
So when the largestfund manager in the world, with assets under
management approaching $1 trillion, began aggressively buying and
recommending municipal bonds to avoid potential tax increases due
to the fiscal cliff, the Street took note. LikeTreasuries ,
municipalsbonds or "munis" are issued by the government. But
instead of coming from the federal government, these bonds are
issued by local municipalities like cities, counties and public
Gross' interest in municipal bonds is because of their special
tax handling. Unlike Treasury and corporate bonds,municipal bond
holders are exempt from paying federalincome tax on interest
income. Some municipal bonds are tax-exempt on the state level as
well. This can translate into big tax savings, particularly for
earners in higher tax brackets.
SPDR Nuveen Barclays Capital Muni Bond (
for example, which is anexchange-traded fund (ETF) that tracks the
performance of the Barclays Municipal Managed MoneyIndex .
Thismunicipal bond ETF 's statedyield is almost 3%, which is an
already respectable return in a low-yield environment. But for
someone withtaxable income of $250,000, falling into the 39%
federaltax bracket that's supposed to kick in on Jan. 1, 2013,
avoidingtaxes on this extra stream of income lifts theeffective
yield of the TFI to about 4.3%. And that's not including exemptions
on the state level, which potentially push yields above 5%.
That's almost three times the return of thebenchmark
10-yearTreasury note and better than most investment-grade
iShares iBoxxInvestment Grade Corporate Bond (
, which yields almost 4% and the
iShares Barclays Credit Bond (
, which yields 3.5%. But these investment-grade corporate bonds are
not tax-exempt, so when you add in taxes from either income or
capital gains, then the advantages of municipal bonds are even more
pronounced. Those tax savings have driven big capital inflows into
municipal bonds in the past three months. The chart below shows the
TFI recently hitting a new all-time high.
Big institutional investors like Gross are fueling thisbullish
movement, but retirees searching for income are also driving the
trend. Munis are a great way for retirees to invest in relatively
stable and secure assets while picking up an outsized, tax-exempt
yield. These are the kind of assets we here at Street Authoritycall
"Retirement Savings Stocks."
Although there is slim chance municipal bonds could lose their
special tax treatment in negotiations related to the fiscal cliff,
as it stands, there are not too many other places for investors to
findtax shelter and a great yield.
Here are three of my favorite municipal bond ETFs.
1. iShares S&P National AMT-Free Muni Bond (
This is the highestvolume and mostliquid municipal bond ETF in
themarket , with average daily volume of 248,000 and about
$3.5 billion in assets under management. The MUB
corresponds to the performance of the S&P National AMT-Free
Municipal Bond Index, an index of investment-grade municipal bonds.
With a stated yield of almost 3%, high earners can easily reach
into a 4% effective yield with special tax treatment on income.
With anexpense ratio of 0.25%, slightly below the category average
of 0.28%, this muni bond ETF is also a great bargain right now.
2. Market Vectors High-Yield Muni ETF (
This is also a municipal bondindex fund , seeking to replicate
price and yield of the Barclays Capital Municipal Custom High-Yield
Composite Index. With high-yield carrying exposure to lower credit
grades, this ETF has an outsized stated yield of nearly 5%, the
highest of the group. This has attracted plenty of interest from
investors seeking protection from the tax man, with average daily
volume of 275,000 and a little more than $1 billion in assets under
management. And with an expense ratio of 0.35% also below its
category average of 0.40%, this municipal bond ETF is another great
Retirement Savings Stock
3. Market Vectors Long Municipal Index ETF
This municipal bond ETF corresponds to the price and yield of the
Barclay Capital AMT-Free Long Continuous Municipal index. With
exposure to longer-datedmaturities , this ETF is a little more
volatile than most municipal bonds and bond funds. But investors
are compensated for that extra risk, rewarded with a stated yield
of almost 4% that once again beats Treasuries and investment-grade
corporate bonds. This is a relatively smallmunicipal bond fund ,
with average daily volume of 40,000 sharply lower than the previous
two ETFs, but still providing plenty of liquidity for most
investors. Assets under management are $120 million, and with an
expense ratio of 0.24% below the category average of 0.28%, this
ETF is another great way to cut fees and reduce taxes.
Risks to Consider:
Muni bonds are not totally immune to fiscal issues. Many
municipalities are battling financial problems of their own, which
could potentially weight onasset values and capital gains in the
long run. Although it is highly unlikely, new fiscal cliff
legislation could compromise thetax benefits of municipal bonds as
politicians look for more revenue to fund an outsizeddeficit .
Action to Take -->
Municipal bonds have always been great tax shelters, especially for
high earners and retirees. But with the fiscal cliff creating
uncertainty over taxes, there have been big capital inflows into
the group in the past few months. In spite of those gains,
municipal bonds are still one of the few assets thatoffer
tax-exempt income. And with the fiscal cliff
approaching, investors looking to reduce theirtax liability
can only benefit from the tax-free yields of the muni