The global decline in yields has made some municipal bonds—taxable and tax-free—worth considering as higher-yielding alternatives to taxable bonds.
In fact, they have been attractive enough that even non-U.S. investors and nonmuni-bond mutual funds were net buyers of munis in the first quarter (up $2 billion and $2.4 billion, respectively, based on the “Flow of Funds” report from the Federal Reserve on June 9).
Taxable Muni ETFs …
Build America Bonds (BABs) are a class of municipal bonds that were issued without the usual tax-exempt feature. A total of $181 billion of these taxable munis were issued between 2009 and 2011. As municipal bonds, BABs share the generally strong level of creditworthiness of similarly rated tax-exempt munis, yet the higher taxable yields can be attractive when compared with comparably rated corporate bonds.
There are two muni-bond ETFs—the PowerShares Build America Bond Portfolio (BAB | B-61) and the SPDR Nuveen Barclays Build America Bond ETF (BABS | D-95)—that are focused on Build America Bonds, and their recent performance compares favorably with nonmuni fixed-income ETFs, such as the Vanguard Long Term Bond Index Fund (BLV | C-99) and the SPDR Barclays Long Term Corporate Bond ETF (LWC | B-99).
Chart courtesy of StockCharts.com
… And Tax-Free Muni ETFs
Two interesting but often-overlooked muni ETFs are the VanEck Vectors CEF Municipal Income ETF (XMPT) and the Deutsche X-trackers Municipal Infrastructure Revenue Bond ETF (RVNU | D-73).
XMPT tracks an index comprising leveraged closed-end municipal bond funds. Because of the leverage in the underlying funds, XMPT has a high sensitivity to changes in interest rates and would underperform if rates rise. However, it does have an above-average credit quality because of the over-collateralization in the underlying funds and attractive recent dividends. (To learn more about interest-rate sensitivity and ETFs, read Duration as a Guide With Muni ETFs.)
RVNU is noteworthy because it offers exposure to municipal revenue bonds, a sector that has outperformed both the general obligation bond and the broad municipal bond sectors.
Select S&P Dow Jones Municipal Bond Indices As Of June 15, 2016
S&P Municipal Bond Index
S&P Municipal Bond General Obligation Index
S&P Municipal Bond Revenue Index
S&P Municipal BAB Select Index
For tactical investors seeking temporary exposure to munis by using ETFs, evaluate the tradability of the funds relative to the transaction amount you are considering. Read this article for additional insight on ETF tradability.
The table below highlights all of the muni ETFs with dividend yield or yield to maturity of 2% or higher as of June 15, 2016. Yield to maturity is the rate of return anticipated on a bond if it is held until the maturity date and all the income is reinvested.
Patrick Luby is a fixed-income portfolio strategy specialist who has helped many of the industry's best advisors and their clients understand and navigate the municipal bond market for many years. He is the author of www.IncomeInvestorPerspectives.com and has written a number of muni ETF articles for ETF.com. Click here to go to his author page.
This is not a recommendation to buy, sell or hold any of the securities or strategies mentioned. The author does not provide investment, tax, legal or accounting advice. Investors should consult with their own advisor and fully understand their own situation when considering changes to their strategy, tactics or individual investments. Information is based on sources believed to be reliable, but its accuracy is not guaranteed. Additional information is available upon request.