Municipal bond exchange traded funds have become a go-to investment for their decent yields when the tax break is factored in. They offer liquidity, diversification and an income stream for investors.
“A quick primer: Muni bonds come in two flavors — revenue bonds and general obligation bonds. Revenue bonds fund improvements in projects like airports or power plants that generate income. These bonds can repay investors only from that income. In a GO bond, municipalities can raise taxes to repay bondholders,” Susan J. Aloise wrote for InvestorPlace. [Muni-Bond ETFs Stay the Course]
According to Thompson Reuters data, muni-bond ETFs touted $1.1 billion in inflows for the week ended August 8, marking the highest level in 5 months.
The latest concern regarding the muni-bond market concerns the recent bankruptcy filings of three California municipalities — San Bernadino, Stockton and Mammoth Lakes. SEC Chairman Mary Schapiro told Congress last month that the nearly $4 trillion market needs mandatory disclosure rules and uniform accounting standards to better protect investors. The better transparency will help investors understand the muni-market and the risks involved. [Muni-Bond ETFs Yawn at Latest Bankruptcy]
For those investors that want exposure to this corner of the market, with the ease of one-shot diversification and better liquidity, ETFs may be the answer. Here are a few to consider:
- Market Vectors High Yield Municipal Index (HYD) This ETF has $781 million in assets, and focuses on lower credit quality, higher-yielding bonds. The fund boasts a current dividend yield of 5.1%. HYD’s year-to-date return is nearly 12%, and it has an expense ratio of 0.35%.
- iShares S&P AMT Free Municipal Bond Fund (MUB) Top holdings include bonds from California, Illinois, South Carolina and Texas. With more than $3 billion in assets, MUB has a current dividend yield of 3%. Its year-to-date return is nearly 5%, and it has a tiny expense ratio of 0.25%.
- PowerShares Insured National Municipal Bond Portfolio (PZA) Top holdings include revenue bonds for Puerto Rico, Florida, Texas and New Jersey. With nearly $815 million in assets, PZA has a current dividend yield of 4.2%. Its year-to-date return is 7.5%, and it has an expense ratio of 0.28%.
- Market Vectors Long Municipal Index (MLN) MLN is the smallest ETF in this group with assets of $102 million. It has a current dividend yield of 4%. Its year-to-date return is 7.9%, and it has an expense ratio of 0.24%. [Uncertainty Over Tax Breaks May Hit Muni-Bond ETFs]
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, 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.