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Strong Finances Boost Appeal of California Muni ETFs


California municipal bond exchange traded funds look like a stable and reliable source of income as fiscally responsible policies keep the most-indebted state on a path toward further ratings upgrades.

California has limited its borrowing, and state taxes on income and corporate earnings now exceed estimates. For the first two quarters of the year, revenue surpassed Governor Jerry Brown’s 2.1% expectations, reports James Nash for Bloomberg.

Brown has stated that California finished the last fiscal year with a positive cash balance for the first time since 2007. [Frugal Communities Keep Debt Low, Rally in Muni ETFs Going]

“The economy in California is certainly leading the U.S.,” Burt Mulford, a manager of munis at Eagle Asset Management, said in the article. “It’s one of the more volatile states, but we’re very optimistic about California. We continue to see value there.”

The healthier Californian finances has attracted heavier investments, with California muni ETFs outperforming in the space. Year-to-date, the iShares California AMT-Free Muni Bond ETF (CMF) increased 9.8%, SPDR Nuveen Barclays California Municipal Bond ETF (CXA) rose 9.2% and PowerShares Insured California Municipal Bond Portfolio (PWZ) gained 12.8%. In comparison, the iShares National AMT-Free Muni Bond ETF (MUB) , which tracks broad investment-grade munis, is only up 7.4% so far this year.

Looking ahead, a new November ballot initiative is seeking to cushion against revenue swings by redirecting taxes on capital gains for a rainy-day fund used for emergencies.

If the initiative passes, Standard & Poor’s has stated that the rating firm may raise California’s rating. California currently has an investment-grade A rating, its sixth-highest grade and the best since January 2010. Nevertheless, S&P remains cautious about the state’s finances.

“We continue to closely watch the state’s revenue performance relative to budget projections,” Gabriel Petek, an S&P analyst, said in the article. “California’s fiscal conditions are notorious for their ability to turn on a dime.”

Moody’s Investors Service raised California’s rating to Aa3 in June, the fourth-hghest grade and highest since 2011. [California Muni Bond ETFs Look Golden]

For more information on California munis, visit our California category.

Max Chen 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.