Prized for decent yields and tax advantages, municipal bonds
that track them could become prime destinations for income
investors if the fiscal cliff becomes a reality. Fears of the
fiscal cliff, the GDP-draining scenario under which old tax
reductions expire and become new tax increases, have already
pounded an array of sectors and ETFs.
telecommunications and utilities names
, just to name a few, have suffered at the hands of the fiscal
cliff. As one example, the Utilities Select SPDR (NYSE:
) has plunged almost 5.9 percent in the past month. Conversely,
the $3.4 billion iShares S&P National AMT-Free Municipal Bond
) has jumped 1.3 percent.
Even with the recent bullishness, municipal bonds and the
corresponding ETFs are not richly valued.
"Not only do munis offer a significant tax advantage, but
municipal bonds look cheap relative to other alternatives,
particularly US Treasuries," said iShares Global Chief Investment
Strategist Russ Koesterich
in a note
. "Over the last 30 years, the 10-year Treasury note typically
yielded about 60 basis points over an index of general obligation
(GO) muni bonds of a similar maturity. Today, thanks to the
Federal Reserve artificially suppressing yields, the Bond Buyer
11- an index of GO munis yields - is yielding 170 basis points
over Treasuries. Given the potential for more volatility, higher
tax rates, and favorable spreads, I would continue advocate
investors remain overweight to municipal bonds."
ETFs such as MUB, which has a 30-day SEC yield of 1.56
percent, and the $1.2 billion SPDR Nuveen Barclays Municipal Bond
) could see increased inflows if the fiscal cliff comes to pass.
Should that happen, the dividend tax rate will rise, at the very
least on those earning more than $250,000 per year. TFI's 30-day
SEC yield is 1.55 percent.
That would likely increase the allure of the tax advantages
offered by municipal bond funds. Municipal bonds are attractive
because these bonds are usually exempt from federal taxes and
many are not subject to state and local taxes, either.
Investors have already been pouring a bit more cash into muni
bond ETFs in the days since Election Day. The iShares S&P
California AMT-Free Municipal Bond Fund (NYSE:
) and MUB both saw inflows from November 7-13 while investors
took almost $400 million out of the iShares iBoxx $ High Yield
Corporate Bond Fund (NYSE:
according to iShares
CMF, which has nearly $275 million in assets under management,
also has a 30-day SEC yield of 1.56 percent. Although the ETF
focuses on muni issues from financially challenged California,
nearly all of the ETF's 377 holdings are rated
Despite concerns about municipal defaults,
a scant percentage of muni bond issues
actually default. That has assuaged investors and helped bolster
inflows to these ETFs this year.
With that in mind, investors looking for more yield while
gaining the fiscal cliff protection offered by municipal bond
ETFs can consider higher-yielding fare such as the Market Vectors
High-Yield Municipal Index ETF (NYSE:
). HYD, which has over $994 million in AUM, has a 30-day SEC
yield of 4.3 percent and pays a monthly dividend. The fund
allocates nearly 22 percent of its weight to California
Another alternative is the $182.4 million SPDR Nuveen S&P
High Yield Municipal Bond ETF (NYSE:
). HYMB, which has a 30-day SEC yield of 4.18 percent, features
an 18 allocation to California bonds.
For more on bond ETFs, click
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