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Inside the Rise of Muni Bond ETFs

Sanghamitra Saha
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The higher the chances of failure of Trump’s proposed policies are, the stronger the trend for muni bonds is. Muni bond investing lost luster in apprehension of Trump’s tax plan. As we all know, municipal bonds are excellent choices for investors seeking a steady stream of tax-free income.

Usually, the interest income from munis is exempt from federal tax and may also not be taxable per state laws, making these especially attractive for investors in the high tax bracket looking to reduce their tax liability. This is totally different from interest on Treasury and corporate bonds that are taxed as regular income.

However, with President Trump pledging for lower personal income tax rates, investors’ desire for a tax shelter in munis was quelled initially. If enacted, the tax cuts would simply replace the need for muni bond investing by taxable treasuries or corporate bonds (read: Trump Tax Plan & Muni Bond ETFs: What Investors Need to Know). 

Also, with the Fed planning to raise interest rates faster this year, the appeal of muni bonds – which offer relatively higher current income than treasuries – was marred.

Trend Reversal

But with uncertainties piling over the possibilities of the passage of Trump’s various pro-growth measures, including the tax plan, have helped muni bond investing. Trump trade seems to have lost some steam on the failure of the Health Care bill.

This has raised questions on the materialization of Trump’s other promises like higher infrastructure spending, deregulation and tax cuts. In fact, it is too early to factor in the tax cut prospects in muni ETF investing.

Plus, safe haven trade like U.S. Treasury bond investing prevailed in the market on geopolitical concerns.  Investors should also note that the yield on the 10-year Treasury note has slid to 2.19% from 2.29% -- the high point of the month touched on August 8, 2017(read: 3 Bond ETFs to Buy Now). 

The Fed is also divided on inflation. While some officials believe that lack of inflationary pressure is temporary, others believe that inflation may be below the target level for a period which exceeds current expectations and fall even further. This has resulted in uncertainty over the future rate hike course, and in fact may delay the next hike (read: Low Volatility ETFs Surge Amid Trump and Fed Worries).

This should perk up demand for muni bonds which are safer than corporate bonds and yield higher than treasuries. According to Moody's Investors Service, the 1970 through 2015 average cumulative 10-year default rate for all rated munis was only 0.15%.

Inside Muni Bond ETFs That Are Rising

The below-mentioned muni bond ETFs have remained steady (see all Municipal Bond ETFshere).

VanEck Vectors High-Yield Municipal Index ETF HYD

The fund looks to track the Barclays Municipal Custom High Yield Composite Index. This measures the overall performance of the U.S. dollar denominated high yield long-term tax-exempt bond market. The fund yields about 4.34% annually (as of August 17, 2017).

iShares iBonds Sep 2018 Term Muni Bond ETF IBMG

The underlying index of the fund is the S&P AMT-Free Municipal Series 2018 Index. It has low default and interest rate risks as evident from 0.91 years of weighted average maturity and 0.89 years of effective duration, respectively. The fund yields 0.84% annually.

VanEck Vectors AMT-Free Long Municipal Index ETF MLN

The underlying index of the fund — the Barclays AMT-Free Long Continuous Municipal Index —looks to track the overall performance of the U.S. dollar denominated long-term tax-exempt bond market. The fund charges 24 bps in fees and yields about 2.99% annually.

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VANECK-AMT FLM (MLN): ETF Research Reports
VANECK-HY MUNI (HYD): ETF Research Reports
ISHRSB-SEP 2018 (IBMG): ETF Research Reports
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