Municipal bonds ETF

Municipal bonds ETFs are of much interest in the fixed income sector nowadays. They have the additional incentive of providing tax free income specially in the time when taxes are expected to go higher. They can make a positive contribution to an investor’s portfolio. In order to invest in a municipal bond ETF certain factors need to be considered. The strength of the assets and their diversification offer safety for the muni bond ETFs. The asset size being smaller projects the possibility of the fund being closed down. The security and their ability to offer a steady income have made them a good investing option.

Repaying investors who have invested in municipal bonds can be difficult if there are tough economic times and lower tax revenues. In such scenarios the general obligation bonds project less risk and it is amplified for municipal bonds ETFs due to risk of bankruptcy. Municipal bonds ETFs with short average maturity would tend to perform better than those with longer maturities. Such would include muni bond ETFs like SPDRS Barclays Capital Short Term Municipal Bonds ETF (NYSE: SHM) and S&P Short Term National Municipal Bonds ETF (NYSE:SUB) which have a short average maturity and SPDR Barclays Capital Municipal Bonds ETF (NYSE:TFI) which has a maturity of almost 14 years.

Recently stock markets have shown yields on AAA-rated general obligations muni-bonds, which is about 1.5% higher than Treasuries. Similarly rising deficits will keep the yields high and the muni bonds will eventually deviate back to their normal prices. Some factors however did affect the bond market which includes budget deficits of states in the US. The analysts showed that the market was facing a virtual ‘buyers strike’ as investors have stepped to the sidelines.

S&P National Municipal Bonds Fund ETF (MUB)

These issues did lead the municipal bonds ETF market in a topsy-turvy situation. By far the most popular ETF tracking this market is the S&P National Municipal Bonds Fund ETF (MUB) which is greatly experiencing a rise in its moving average. It has a yield of about 3.76% last year. It has accumulated net assets of over $2 billion. It tracks the S&P National AMT-Free Municipal Bond Index measuring the performance of the US municipal bond market.

iShares S&P CA AMT Free Municipal Bond Fund (CMF)

Amongst the other hardest hit ETFs in the muni bond market iShares S&P CA AMT Free Municipal Bond Fund (CMF) also has faced a crumbling fiscal situation. It holds over 22 different bonds in total with weightings going to various purpose and utility bonds.

Market Vectors-Long Municipal Index ETF (MLN)

Market Vectors-Long Municipal Index ETF (MLN) tracking the Barclays Capital AMT-Free Long Continuous Municipal Index has a nominal maturity of over 17 years. Such ETFs are more vulnerable to interest rate changes in the overall market. It has also experienced lower prices last year. Read more

Despite being a safe sector of the fixed market, the confidence of the investors did suffer from the inability to repay their debts. This can create a downfall in the stable muni bond market but still the chances of an upsurge are not to be ignored in this regard.