Duration As Guide With Muni ETFs

February 22, 2016

Income Generation with Principal Preservation: As with a portfolio of individual bonds, you could consider assembling a “laddered” portfolio of ETFs with diversified allocations to several funds with increasingly higher durations.

Ticker Sample Muni ETF Ladder:
iShares iBonds AMT-Free Muni
Duration Dividend Yield
Prior 12 months income to share price
Weighted Credit Quality YTM
as of 2/12/2016
IBMF Sept 2017 1.54 1.23% AA 0.70%
IBMG Sept 2018 2.44 0.92% AA 0.97%
IBMH Sept 2019 3.30 1.07% AA 1.16%
IBMI Sept 2020 4.14 1.20% AA 1.36%
IBMJ Dec 2021 4.96 -- AA- 1.56%
IBMK Dec 2022 5.71 -- AA- 1.78%
Ticker Sample Muni ETF Ladder:
Market Vectors AMT-Free Muni
Duration Dividend Yield
Prior 12 months income to share price
Weighted Credit Quality YTM
as of 2/12/2016
SMB Short 2.93 1.12% AA- 1.28%
ITM Intermediate 7.25 2.24% AA- 2.87%
MLN Long 10.14 3.33% A+ 4.11%


Additional Comments

Bonds are widely thought of as “safe” investments, primarily because of the predictability of the interest income and the fixed maturity dates. Of course there are risks to investing in bonds—most familiar are credit risk and market risk, but there are others.

Credit risk refers to the ability of an issuer to be able to fulfill their obligations as they come due.

Market risk: Because bonds sold prior to maturity may be subject to a loss if rates move higher, municipal bond ETFs are also subject to market risk. As markets move and sentiment changes, actual changes in market value can be greater or lesser than expected.

  • Reinvestment risk is the risk that the interest or the matured principal of a bond may not be able to be reinvested in a similar investment at a comparable yield. Reinvestment risk goes up as maturity dates get shorter and as prevailing interest rates decline.
  • A laddered bond portfolio has equal amounts of principal maturing at regular intervals throughout the life of the portfolio and is considered an interest-rate-neutral strategy, because it favors neither a rise nor a fall in interest rates. By having bonds rolling off on a regular basis, an investor may be able to avoid missing the opportunity of locking in attractive rates when yields are high, or having too much of a portfolio locked into lower rates. An ETF investor can employ a similar strategy by using funds of increasing durations for each rung of the ladder. The additional benefit of the ETF ladder is that the funds are managed to maintain a fairly constant duration, so unlike a bond portfolio that will need regular maintenance, a laddered ETF portfolio may be easier to supervise and manage.
  • Finding the duration of a municipal bond ETF is easy on www.ETF.com. Go to ETF ANALYTICS & DATA / ETF Screener & Database, and after selecting the ETFs you are researching, click on the Fundamentals tab.

Patrick Luby is the author of www.IncomeInvestorPerspectives.com and has decades of experience in helping advisors and investors understand the municipal bond market.

The opinions expressed and the information contained herein is based on sources believed to be reliable, but its accuracy and appropriateness is not guaranteed. Past performance is interesting but is not a guarantee of future results. 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. Investments in bonds and fixed-income ETFs are subject to gains/losses based on the level of interest rates, market conditions and changes in credit quality of bond issuers. Additional information available upon request.

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