The U.S. municipal bond market, which saw volatile trading in
2013, seems to be finally having its good days. Munis have
recovered some of the losses from last year and are finally trading
in the green.
In fact, the $3.7 trillion municipal market gained in March for the
first time in six years, according to
. The munis market has gained around 3.8% during the first quarter
this year, marking it as the best start to a year since 2009.
During the first quarter of 2009, munis had clocked a gain of 4.4%
Three Municipal Bond ETFs for 2014
Demand - supply imbalance seems to be the primary reason for these
rebounding returns in this market. While the demand for munis
is robust this year, shortage of supply is driving the gains
higher. Total issuance for municipal bonds during the first quarter
of 2014 stood at $
, the slowest since the second quarter of 2011.
Though this seems to be a major force for first quarter returns,
improving fiscal conditions in many localities and low interest
rates are also favoring municipal bonds returns.
Rising interest rates, as a result of Fed taper threats, Detroit's
bankruptcy filing and the concerns on the financial soundness of
Chicago, California and Puerto Rico were some of the culprits for
the poor performance of munis last year.
Munis are bonds issued by city, state and country governments to
raise money for different community projects including highways,
new schools, or hospitals. Usually the interest income from munis
is exempt from federal tax and may also avoid state taxes.
However, in case the underlying investment planned to be financed
by the municipal bond issue fails to provide any significant
benefit to the general public, bonds can lose their tax status and
the Federal government then levies taxes on the interest on the
Amid these restrictions and declining costs for taxable debt, many
issuers are issuing taxable corporate bonds. Issuers are thus
favoring the flexibility of selling munis without the tax exemption
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These taxable munis hold an appeal for overseas buyers over the
tax-free munis and are continuing to attract international interest
ever since its debut in 2009. Moreover, these bonds have also
received appreciation among U.S. investors for their wider appeal.
With improving fiscal conditions, low chances of interest rates
rising this year and taxable munis gaining popularity, a look at a
top ranked ETF in the Municipal Bond space would be the best option
to capture the uptrend, and to reduce risks for equity heavy
About the Zacks ETF Rank
A look at top ranked Municipal Bond ETFs can be done by using the
Zacks ETF Rank. This technique provides a recommendation for the
ETF in the context of our outlook of the underlying industry,
sector, style box, or asset class. Our proprietary methodology also
takes into account the risk preferences of investors as well.
The aim of our model is to select the best ETFs within each risk
category. We assign each ETF one of the five ranks within each risk
bucket. Thus, a Zacks Rank reflects the expected return of an ETF
relative to other ETFs with a similar level of risk.
Using this strategy, we have found one ETF Ranked 2 or 'Buy'-
SPDR Nuveen Barclays Build America Bond ETF
) - which we have highlighted in greater detail below (see all
Municipal Bond ETFs here
BABS in Focus
Launched in May 2010, the fund tracks the performance of Barclays
Build America Bond Index.
Build America bonds first made their appearance following the 2008
financial crisis. These bonds were introduced to stimulate
investment in infrastructure projects in the economy such as public
schools, roads, transportation infrastructure, bridges, ports and
Build America bonds typically pay taxes closer to taxable corporate
bonds and the interest received on these bonds is subject to
federal income tax and may be subject to state income tax (read:
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The fund holds a basket of 184 bonds and targets the long end of
the yield curve. The fund holds longer maturity bonds and has an
average maturity of 25.74 years with modified adjusted duration of
12.60 years. The 30 Day SEC yield for the fund stands at 5.12% with
yield to maturity at 4.63%.
The fund seems to be well diversified among its holdings, except
for the top two holdings - California and New Jersey munis - which
together account for around 14% of the total assets.
Also, the fund assets are diversified across various states, with
bonds issued by California (35.44%) taking the top spot, followed
by New York (15.09%) and Texas (10.20%).
After slumping 2% in the past one year, BABS has retuned 9.2% since
the start of the year and has been a top performer in the national
munis space. Moreover, the fund has also performed well over
the past three years, returning 39%. The fund charges 35 basis
points a year and manages an asset base of $52.6 million, and it
may be an interesting low risk pick for investors seeking a muni
bond play at this time.
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