Municipal bond investors can breathe a sigh of relief now that
the fiscal cliff debate has been put to bed without new tax
treatment of municipal bond interest. During the cliff debate,
municipal bond investors endured a major scare as
Democrats and Republicans
warmed to the idea of taxing interest earned on these bonds.
That interest has not been taxed for over a century and just the
mere speculation that one of the primary allures of investing in
municipal bonds could go by the wayside
marquee ETFs tracking the asset class tumbling
.
Fortunately,
muni bond ETFs averted disaster
and may be able to generate upside to go along with the income
component in 2013.
The Market Vectors High-Yield Muni ETF (NYSE:
HYD
), the largest ETF tracking high-yield munis, and the iShares
S&P National AMT-Free Municipal Bond ETF (NYSE:
MUB
), the largest muni bond ETF of any kind, have reclaimed some of
their pre-cliff resolution losses. New tax rates on wealthy
Americans could make municipal bonds and the corresponding
ETFs
even more attractive this year.
"Personal income taxes for individuals with income over $400,000
and households over $450,000 will increase; as will taxes on
dividends and capital gains for those investors,"
notes Market Vectors Portfolio Manager Jim
Colby
.
Now that it is clear municipal bond interest will remain
tax-free, some wealthy investors may be inclined to hunt for yield
and income with the likes of HYD and MUB rather than pay the IRS an
elevated tax from dividends earned on equities.
Colby, who serves as portfolio manager for HYD and several other
Market Vectors ETFs including the Market Vectors CEF Municipal
Income ETF (NYSE:
XMPT
) and the Market Vectors Long Municipal Index ETF (NYSE:
MLN
), higher taxes for some Americans make munis all the more
attractive.
"At this time, tax-free investors can exhale knowing that their
tax-free income streams remain preserved as we roll off the second
strong performance year in a row; the Barclays Municipal Bond Index
returned 6.78% in 2012. With higher taxes coming for many
Americans, I believe the tax-free coupon makes munis all the more
desirable," he said.
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.
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