A Trifecta of Tailwinds Are Benefiting Municipal Bonds
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Right now, the municipal bond space has a trifecta of tailwinds blowing in its favor. That said, the time is right for investors who have not yet considered adding munis to their existing bond portfolio.
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Investors looking to park their cash in a high-quality, high-yielding asset should certainly take notice of munis. The backdrop of a strong economy heading into 2025 should make munis even more attractive.
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When it comes to credit quality, munis are situated in between corporate bonds and safe haven Treasuries. Fundamentally, munis have improved over the past few years, making them an ideal option for fixed income investors looking to balance credit risk and yield.
“All of those things make for a trifecta for the muni market,” said Paul Malloy, head of U.S. municipals at Vanguard Group.
Of course, the prime feature offered by munis is their tax-free income at the federal level, while certain state-issued bonds can also provide tax-free income benefits in the case of state-specific funds. Given the higher yields, it’s no surprise that the muni market is seeing strong inflows, as reported by Barron’s, who noted that research firm EPFR recorded net monthly inflows of $42 billion into funds with muni exposure from the beginning of the year through November.
2 Options for Muni Exposure
Investors who want to add munis, but don’t want to pore over data and build their own portfolio of single bond issues, can opt for a broad-based option such as the Vanguard Tax-Exempt Bond ETF (VTEB). The fund tracks the Standard & Poor’s National AMT-Free Municipal Bond Index. This index measures the performance of the investment-grade segment of the U.S. municipal bond market, giving investors only the highest quality issues.
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The fund is heavily diversified with the index including debt issues from state or local governments or agencies whose interests are exempt from U.S. federal income taxes, and the federal alternative minimum tax. Furthermore, for the cost conscious, VTEB also features a low 0.05% expense ratio.
Investors might consider the Vanguard Short-Term Tax-Exempt Bond ETF (VTES) if they’re looking to shorten duration on their muni exposure. Like VTEB, exposure comes with a low 0.07% expense ratio.
The fund tracks the S&P 0-7 Year National AMT-Free Municipal Bond Index. That index aims to balance tax efficiency with tax-exempt yield. For an appropriate level of duration risk, this balance can translate to potentially higher yields than those afforded by competing strategies.
For more news, information, and analysis, visit the Fixed Income Channel.
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