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.