With the Federal Reserve holding off on raising interest rates to this point in 2016, investors have been flocking to longer-dated fixed income exchange traded funds, including municipal bond funds.
Municipal bonds and the corresponding ETFs are popular among conservative, income investors for added yield, tax advantages and as an avenue for diversification in portfolios with U.S. government bonds.
Since muni bond interest is exempt from federal taxes, muni ETFs are a good way for investors seeking tax-exempt income, especially those in higher tax brackets. Due to its tax-exempt status, the asset category is also best utilized in taxable accounts. The tax-exempt status also creates high demand for municipal bonds. Consequently, the perceived bond yields are typically lower than their taxable counterparts.
Munis also help diversify fixed-income portfolios. Investors who typically follow the Barclays U.S. Aggregate Bond Index will not have municipal bond exposure, so a muni bond ETF can complement core fixed-income positions.
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HYD “is the third-largest of all municipal bond ETFs. The fund has a weighted average maturity of 20.83 years and duration of 8.3, which signify the sensitivity to interest rate changes. The fund mitigates credit risk to a degree with the allocation of approximately 33% of the portfolio to munis with BBB ratings from Standard & Poor’s. The fund has a portfolio allocation of 2.84% to Puerto Rican municipal bonds ,” according to Investopedia .
Moreover, low and even negative yields on global government bonds have made U.S. assets, including munis, increasingly more appealing relative to other fixed-income assets. For example, foreign investors have increased the amount of municipal debt they hold by 44% to $85 billion from 2009 through 2015, according to the Federal Reserve.
HYD “has a distribution yield of 4.72% and an expense ratio of 0.35%. Over the last three years prior to 2016, the fund has an annualized return of 3.53%. Its five-year annualized gain of 7.74% places this fund’s returns for the time frame among the highest of all municipal bond ETFs ,” adds Investopedia.
For more information on the munis market, visit our municipal bonds category .
VanEck Vectors High Yield Municipal Index ETF