Before the COVID-19 pandemic shook the capital markets, it was almost as if investors could throw darts on a board of municipal bonds and wherever it landed was deemed a safe investment. That certainly changed even in the muni bond space and moving forward, investor due diligence is vital.
“During times like this, when people are concerned not just about the overall economy but also their physical well-being, investors can naturally gravitate towards investments with less volatility,” wrote Jason Ware in ThinkAdvisor. “Municipal bonds, like any fixed income security, are exposed to interest rate risk and vary in duration. With a fixed coupon bond, the longer the time until bond maturity, the more susceptible investors are to interest rate changes that will affect the value of their investment.”
“Laddering the municipal bonds by final maturity within portfolios may help investors with longer investment horizons help reduce interest rate risk,” Ware added. “If, for example, an investor has $1 million to invest in municipal bonds, their advisor can work with them to identify a diverse mix of bonds with shorter durations of two to three years, and longer durations of 10 or 15 years.”
To continue reading Ware’s due diligence strategies in munis, click here.
Investors looking to move into the muni bond ETF space can take a look at the funds:
- iShares National Muni Bond ETF (NYSEArca: MUB): seeks to track the investment results of the S&P National AMT-Free Municipal Bond IndexTM. The fund generally will invest at least 90% of its assets in the component securities of the underlying index and may invest up to 10% of its assets in certain futures, options and swap contracts, cash and cash equivalents. The index measures the performance of the investment-grade segment of the U.S. municipal bond market.
- SPDR Nuveen Bloomberg Barclays Short Term Municipal Bond ETF (NYSEArca: SHM): seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the Bloomberg Barclays Managed Money Municipal Short Term Index. The fund invests substantially all, but at least 80%, of its total assets in the securities comprising the index and in securities that the Sub-Adviser determines have economic characteristics that are substantially identical to the economic characteristics of the securities that comprise the index. The index tracks the short term tax-exempt municipal bond market and provides income that is exempt from federal income taxes.
An active option in the municipal bond space to consider is the American Century Diversified Municipal Bond ETF (TAXF). The fund seeks current income that is exempt from federal income tax. The fund invests in municipal and other debt securities.
Under normal market conditions, the portfolio managers invest at least 80% of the fund’s net assets, plus borrowings for investment purposes, in municipal securities with interest payments exempt from federal income tax. The fund principally invests in investment-grade debt securities but may invest in high-yield securities (junk bonds).
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