Muni ETFs Battered, But Could Offer Value

January 09, 2017

Investment-grade municipal bond ETFs took a beating following last November’s presidential election, with some of the largest funds in the segment slipping to lows not seen since mid-2015.

That decline centered mostly on uncertainty—tax policy uncertainty, that is.

One of the big perks of muni bond investing is the tax-exempt status many enjoy, and any new administration can shake things up in the tax department.

Consider the trailing 12-month performance of some of the largest investment-grade muni bond ETFs, and the notable drop last November. The funds include:

Chart courtesy of

“U.S. munis are a hot topic because of the Trump uncertainty—it’s all about taxes,” said J.R. Rieger, managing director and global head of fixed income at S&P Dow Jones Indices. “Even if you put aside all the risks associated with bonds, there is also the tax risk impacting muni bonds.”

According to him, there are two main areas of concern when it comes to munis and taxation. First, will the new administration change in any way munis’ tax exemption?

Secondly, what will other bonds be taxed at? For instance, could taxable interest on corporate bonds be lowered?

“It’s hard to forecast how and what tax changes will be made,” Rieger said. “Historically, there’ve been attempts to change tax exemption on muni bonds before, but they’ve all met with early demise. Still, there’s uncertainty.”


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