Muni Bond ETF Rally: ‘Higher Taxes are Coming’

ETF Trends

Municipal bond ETFs have been popular on expectations investors will see higher taxes in 2013 if the Bush-era tax cuts are allowed to expire. Also, tax-exempt muni bonds have attractive yields relative to Treasuries for taxable accounts.

“We’re looking at an environment with higher taxes coming — we already know that,” says Chip Norton, Managing Director of Fixed-Income Strategies at Wasmer, Schroeder & Co. “The Bush tax cuts are going to phase out in a few months and investors already know that they’re going to have a higher tax bill and they’re absolutely looking for ways to be more tax efficient in their overall asset allocation.”

ETF Trends Editor Tom Lydon recently spoke with Norton at the Schwab IMPACT conference. Wasmer, Schroeder manages separate accounts, including a taxable municipal fixed-income strategy. [Best Muni Bond ETFs for Yield]

Norton said his firm is seeing increased demand from advisors for muni bonds and ETFs as the fiscal cliff looms. With all this demand, rates have been pushed down “pretty dramatically” in muni bonds following Obama’s re-election.

“Total returns are great but rates are low,” he said. However, the tax-exempt status of munis makes them attractive relative to other low-yielding areas of the fixed-income market. The yield on the 10-year Treasury note is about 1.6% while money market funds are essentially yielding zero. [Muni Bond ETFs and Taxes]

Tax-exempt muni bonds yielding 2% “make a lot of sense for investors,” Norton said. [Why Muni Bond ETFs are Solid]

He also weighs in on speculation Congress may go after the tax-exempt status of munis, and why the supply of bonds is down. [Will New SEC Chief Derail Muni Bond Rally?]

Watch the video to see the full interview.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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