Muni Bond ETFs: Yield, Safety and Tax Advantages

ETF Trends

ETFs that invest in municipal bonds have seen very respectable inflows this year as investors comb through fixed-income markets in search of extra yield. Some investors are also using them as a safe haven in place of low-yielding Treasuries while the tax advantages of muni bonds are always a bonus.

“There’s a growing appetite across a wider range of investors given the relative attractiveness and uncertainty over tax policy,” Dan Heckman, senior fixed income strategist with U.S. Bank Wealth Management, tells MarketWatch. “They look at munis as another safe haven outside of Treasurys, and you pick up additional yield and a tax advantage. It’s a good value proposition because yields are still higher in some cases than on Treasurys and in some case corporate bonds.”

Additionally, investors are feeling more comfortable about the credit quality of muni bonds as local governments shore up their finances. Still, San Bernardino over the summer became the third municipality in California to file for bankruptcy. [Buffett Moves Highlight Risks of Muni, High-Yield Bond ETFs]

The largest muni bond ETFs include iShares S&P National AMT-Free Municipal Bond (MUB), Market Vectors High-Yield Municipal (HYD), PowerShares Insured National Municipal Bond (PZA), PowerShares Build America Bond (BAB), SPDR Barclays Capital Municipal Bond (TFI) and SPDR Nuveen Barclays Capital Short Term Municipal Bond (SHM).

Combined, these six muni bond ETFs have gathered inflows of nearly $2 billion so far in 2012. [Tax Break Makes Muni Bond ETF Yields More Attractive]

MUB, the largest muni bond ETF with assets of $3.2 billion, has posted a total return of 9% the past year. So far in 2012, the fund has raked in $549 million of inflows, according to IndexUniverse data. MUB has a 12-month yield of 3%, according to manager BlackRock. [Muni Bond ETFs For Liquidity and Yield]

“The secondary market seems poised for municipal bond prices to move higher. Dealers appear comfortable with current municipal market levels and we have seen increased interest in the shorter end of the curve,” says James Colby, portfolio manager and senior municipal strategist at Market Vectors ETFs. [Muni Bond ETFs: Red Light, Green Light]

Investors hunting for yield are finding it in an unsuspected place: the municipal bond market, MarketWatch reports. A broader range of investors are becoming interested in the sector, which is also doing a better job of tackling its pension and retiree issues, it adds.

The national trade group representing U.S. bond dealers announced on Wednesday the formation of a coalition to defend the tax-exempt status of municipal bonds, a key trait of the $3.7 trillion market, Reuters reports.

“Municipal-bond funds in general are most suitable for use by investors in high annual tax brackets for use in their taxable accounts,” writes Morningstar ETF analyst Tim Strauts in a report on iShares S&P National AMT-Free Municipal Bond. “The reason is that interest income from municipal bonds is tax-free at the federal level. Therefore, investors with the highest marginal tax rates are able to best utilize the tax-shielding profits and maximize their return on the bonds.”

iShares S&P National AMT-Free Municipal Bond

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Post updated to correct James Colby’s title. He is portfolio manager and senior municipal strategist at Market Vectors ETFs.

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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