Best Investment Grade Municipal Bond Funds

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What Is A Municipal Bond

Municipal Bonds: The Best Income Investment of 2014?

Municipal bonds are debt instruments issued by states or municipalities that allow them to borrow money for a specific purpose.

The funds raised by a bond sale might be used to build roads or improve infrastructure, build schools or to support beneficial community projects like hospitals or health centers.

Municipal bond defaults are possible but extremely rare. A bond default occurs when the bond issuer fails to make a payment toward interest or principal within a specified period.

U.S. Treasury bonds are generally regarded to be the safest type of bond investment but generally dont provide the same rate of return as municipal bonds and dont have the same tax advantages found with municipal bonds.

Check out our guide on how to buy municipal bonds.

How Municipal Bonds Work

A municipal bond is a debt issued by a state or municipality to fund public works. Like other bonds, investors lend money to the issuer for a predetermined period of time. The issuer promises to pay the investor interest over the term of the bond and then return the principal to the investor when the bond matures.

For example, if you invest $5,000 in a 10-year municipal bond paying 4% interest, you’ve loaned $5,000 for 10 years. In return, the municipality will pay you $200 annually in interest — typically in biannual installments — and then return your $5,000 at maturity in 10 years.

Bond values are usually more stable than stocks, since the value is easy to calculate: You add up the bond’s face value and the interest it will pay. The main thing that affects the value of a bond is the interest rate. A bond that pays a higher interest rate than a new issue — meaning brand-new bonds just coming up for sale — is worth more money, while a bond that pays a lower interest rate than a new issue is worth less money. That’s because the price you could sell the bond or buy it for is adjusted up or down based on current available yields.

Blackrock Municipal Income Quality Review

Seeking Alpha describes this CEF as:

The BlackRock Municipal Income Quality CEF primarily invests in investment grade municipal bonds exempt from federal income taxes, including the alternative minimum tax. Up to 20% of the assets may be invested in bonds rated below Aaa or AAA . It may invest up to 10% of its assets in other investment companies that invest primarily in municipal bonds of the types in which the Trust may invest directly or in tax-exempt preferred shares that pay dividends exempt from regular Federal income tax. The Trust may enter into interest rate swaps, caps and floors, Futures contracts and Options on Futures contracts for risk management purposes. BYM started in 2002 and doesnât use a benchmark.

blackrock.com BYM

BlackRock provided some basic data about BYM’s portfolio.

blackrock.com BYM

Here, the WAC is more in line with what I expected for a Municipal bond CEF, 3.69%. That said, the YTM is over 7%, implying the average bond price is below Par. BYM gives investors a true choice from EVN in terms of both duration and maturity .

blackrock.com BYM

The longer average maturity is partially revealed in that BYM has almost 85% of its holdings with 15+ years left versus about 75% for EVN. Just under 20% can be called before 2025.

blackrock.com BYM

blackrock.com BYM

blackrock.com BYM

Unlike EVN, BYM has three states with over a 10% exposure. Overall, 36 states are represented.

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The investment information provided in this table is for informational and general educational purposes only and should not be construed as investment or financial advice. Bankrate does not offer advisory or brokerage services, nor does it provide individualized recommendations or personalized investment advice. Investment decisions should be based on an evaluation of your own personal financial situation, needs, risk tolerance and investment objectives. Investing involves risk including the potential loss of principal.

What To Carefully Watch

5 Municipal Bond Funds That Put 6.6%

Bonds rated lower than BBB. The default rate for municipal bonds begins to skyrocket for bonds rated BB or lower, with bonds rated C or lower sometimes having staggeringly high default rates.

Yields too good to be true. If the yield from a municipal bond seems too good to be true, check the bond rating from Moody or S& P. High yields and lower bond ratings can go hand-in-hand.

Also, check the coupon amount. Bonds that are traded after issuance can have posted yields that dont make quite as much sense as the coupon rate. A higher yield can be a more profitable bond investment but only if the state or municipality doesnt default on its debt obligations.

Revenue bonds. These pay bondholders from revenue generated from the project for which the bond was issued. This isnt necessarily a bad thing, but it can create additional risk.

State and local governments might be good at governing but thats not a guarantee that any revenue-based ventures will be successful, potentially creating a risk that bond obligations wont be paid.

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How Does The Bond Landscape Look Today

Reviewing our current landscape, when considering the same search criteria as above, average non-rated exposure grew by 23% since December 2015flirting with levels similar to 2008. This doesnt necessarily indicate that an end is imminent, although it does indicate that if volatility emergesand the markets come unhingedfunds that have increased their exposure to riskier issues may not have the flexibility to sidestep potential pull backs. The reason being, NR issues that have a brighter outlook would be lumped into the same category as ones that may not have a favorable outlook. This would prompt investors to sell or steer clear of the asset class in generalthe proverbial tossing out the baby with the bathwater scenario.

How To Find Bargains In Municipal Bond Funds

Tax-exempt bonds have gotten a lot cheaper. Heres a guide to finding the best deals.

Borrower in California

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Rates up, prices down. The bond market crash has not spared municipal-bond funds. In the first half of the year they have managed to lose as much as 30% of their investors money.

Look on the bright side. If youre one of the losers, take a capital loss and immediately reinvest in a similar fund. If you are new to tax-exempt investing, relish the fact that youll get a much better deal now than you would have just a few months ago.

For this guide I picked through three different kinds of muni fundsmutual, exchange-traded and closed-endlooking for good deals. Here, good means having an annual net cost no higher than 0.2%, or $200 a year per $100,000 invested.

Twenty-eight funds made the cut. Among mutual funds, the only ones worth your attention are from Fidelity and Vanguard. With ETFs, seven providers qualify. The list of cost-effective closed-end muni funds is very short: two products, both from Nuveen.

Who should own tax-exempt bonds? An investor in a somewhat high tax bracket who needs a somewhat conservative investment.

Ill define a tax bracket as somewhat high if its at least 24%, corresponding to roughly $200,000 or more of adjusted gross income on a joint return. If youre in a lower bracket you should probably stick to taxable bonds. With munis youd be competing with rich buyers who are more avid for the tax break.

Mutual funds

ETFs

Closed-ends

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Spdr Nuveen Bloomberg Barclays High Yield Municipal Bond Etf

The SPDR Nuveen Bloomberg Barclays High Yield Municipal Bond ETF seeks to reward investors with income based on bonds issued by U.S. states, the District of Columbia, U.S. territories and local governments or agencies. Year-to-date, the total return is down 11.2%, but 2022 has been anything but normal. The yield, however, is a promising 3.42%.

Vanguard Emerging Markets Government Bond Etf

Pluses and Minuses to High-Yield Municipal Bonds
  • Average Duration: N/A
  • Yield to Maturity: N/A
  • Assets Under Management: $1.46 billion

Vanguard Emerging Markets Government Bond ETF limits its scope to US dollar-denominated emerging market debt. Investors can avoid any direct impact from currency volatilities. Avoiding locally denominated issues limits the impact of currency volatilities on portfolio returns.

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Buy These 3 Municipal Bond Funds For Steady Returns

Municipal bonds, or “muni bonds,” comprises debt securities issued by various states, cities, counties and other governmental entities to raise money to build roads, schools and a host of other projects for the public good. These municipal securities regularly pay interest payments, usually semi-annually, and pay the original investment or principal amount at the time of maturity. Interest paid on such bonds is generally exempted from federal taxes making them especially attractive to people in higher income tax brackets.

Thus, risk-averse investors looking to earn a regular tax-free income may consider municipal bonds mutual funds. These mutual funds are believed to provide regular income while protecting the capital invested. While mutual funds from this category seek to provide dividends more frequently than other bonds, they offer greater stability than those primarily focusing on equity and alternative securities.

Below, we share with you three top-ranked municipal bond funds, viz., Invesco Rochester Municipal Opportunities Fund ORNAX, Delaware National High Yield Municipal Bond Fund Class A CXHYX and AB Municipal Bond Inflation Strategy AUNAX. Each has a Zacks Mutual Fund Rank #1 and is expected to outperform its peers in the future. Investors can

Invesco Rochester Municipal Opportunities Fund has three-year annualized returns of 2%. ORNAX has an expense ratio of 0.69% compared with the category average of 0.92%.

Whats Fueling The Muni

This influx of flows can largely be explained by strong technical demand, which in turn was driven by:

  • Continued economic growthDriven by the U.S. consumer and low unemployment.
  • Concerns about declining credit fundamentals and increasing default rates in corporate bonds Municipals are often used as substitutes for taxable corporate bonds, and concerns are rising about increasing leverage on corporate balance sheets.
  • Tax Cut and Jobs Act of 2017Beginning in 2018, tax reform eliminated benefits of refinancing debt for muni-bond issuers, which contributed to a reduced supply of new tax-exempt issuance in the ensuing two years. Concern over decreased supplyalong with reduced mortgage interest expense deductibilityspurred demand, pushing muni yields lower and credit spreads tighter, while boosting returns.
  • Elevated equity market levelsMunicipals are considered a safe-haven asset class. As equity indexes continue to set record levels, investors may seek out asset classes that protect on the downside while still providing some amount of yield and return. Allocations to equities and bonds typically have outperformed equities and cash during market pullbacks, as evidenced in the chart below.

ndex returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. Indexes are unmanaged and cannot be invested in directly.

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Got A Minute We’re Talking Munis

David Alter

Head of Municipal Credit Research, Goldman Sachs Asset Management

David Alter

Co-Head of Municipal Fixed Income, Goldman Sachs Asset Management

Scott Diamond

  • GSAM Connect

    Municipal Bonds: Are We There Yet?

    09 June 2022The Feds hawkish turn has pushed up yields and pushed down prices of nearly all types of bonds, Munis being no exception. Now, investors face the difficult task of deciding when to wade back in given higher yields, locking in higher income and return potential. Read more about our views on The Feds path here.Read More

  • Municipal Market Quarterly: Choppy Seas – Heightened Volatility Amid Macro Cross-Currents

    30 June 2022Access quarterly fund specific market commentary and performance attribution.

  • GSAM Connect

    Can Municipal Bonds Handle Higher Rates?

    31 January 2022

    Amid a continued strong economic backdrop and persistently high inflation, the Federal Reserve appears set to deliver a series of interest-rate hikes in 2022. Thats makes some municipal bond investors nervous. But recent history suggests Fed rate hikes may not be such bad news for muni portfolios.

Why Nuveen For Tax

Municipal

All investments carry a certain degree of risk, including the loss of principal. Investment objectives may not be met.

1 Nuveen traces its history back to 1898. Nuveen’s asset management business was established in 1989.

2 As of 30 Jun 2022.

3 Cerulli Associates, The Cerulli Report, U.S. Managed Accounts 2021. Data as of 31 Dec 2020, most recent data available. Based on total assets does not include model separate accounts.

4 Nuveen, Morningstar Direct as of 30 Jun 2022. Based on total net assets of U.S. open end funds for the Nuveen Family of Funds and the TIAA CREF Funds, excluding exchange traded funds, money market funds and fund of funds. Based on a review of 1435 fund families and 223 fund families with municipal offerings.

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Iq Mackay Shields Municipal Intermediate Etf

Not unlike the first ETF on this list, the IQ MacKay Shields Municipal Intermediate ETF focuses on a collection of investment-grade bonds. Whats more, the fund is actively managed to reach its own benchmark, and not mimic the current bond market. In doing so, the IQ MacKay Shields Municipal Intermediate ETF tries to maintain a dollar-weighted average for anywhere from three to 10 years.

Best Actively Managed Bond Funds

Long-term investors who dont mind taking a bit of extra market risk might want to think about an actively managed bond fund. It can hold any type of bond in different markets. Some actively managed bond funds are categorized as multi-sector. They hold many types of bonds, including the riskier high-yield bonds and foreign bonds.

These are two of the best actively managed, go-anywhere, multi-sector bond funds.

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Fidelity Investment Grade Bond Fund

The Fidelity Investment Grade Bond Fund is an actively managed fund that seeks to provide a high level of current income. The fund typically invests at least 80 percent of its assets in all types of investment-grade bonds.

5-year annualized return: 1.61 percent

Yield: 1.86 percent

Fund assets: $8.5 billion

Are Bond Funds A Good Investment

Municipal bonds offer a good hedge against equity risk: Peter Hayes BlackRock

Bond funds can be a good investment since funds typically contain many types of bonds, which diversifies your risk of a bond defaulting. In other words, if a corporation experiences financial hardship and fails to repay its bond investors, those who hold the bond in a mutual fund would only have a small portion of their overall investment in that one bond. As a result, they would have less risk of financial loss than had they purchased the bond individually.

However, investors should do their research to ensure that the bonds within the fund are the type of bonds that you want to buy. Sometimes funds can contain both corporate bonds and Treasury bonds, and some of those corporate bonds might be high-risk investments. As a result, its important to research the holdings within a bond fund before investing.

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Vaneck Vectors Short High

The VanEck Vectors Short High-Yield Municipal Index ETF hopes to mimic the results of the Bloomberg Barclays Municipal High Yield Short Duration Index. The Bloomberg Barclays Municipal High Yield Short Duration Index tracks high-yield, short-term, tax-exempt U.S. dollar-denominated municipal bonds. However, in the wake of the Coronavirus, the fund has underperformed in 2022. Year-to-date returns are down 9.4%, but the overall yield is still attractive to investors.

Strong Performance Over The Long Term

Average Annual Total Returns as of 6/30/2022

Y Share Yields as of 6/30/2022

A Word About Risk: Pioneer AMT-Free Municipal Fund

Individuals are encouraged to seek advice from their financial, legal, tax and other appropriate professionals before making any investment or financial decisions or purchasing any financial, securities or investment-related product or service, including any product or service described in these materials. Amundi US does not provide investment advice or investment recommendations.

Before investing, consider the product’s investment objectives, risks, charges and expenses. Contact your financial professional or Amundi US for a prospectus or summary prospectus containing this information. Read it carefully. To obtain a free prospectus or summary prospectus and for information on any Pioneer fund, please download it from our literature section.

Securities offered through Amundi Distributor US, Inc. 60 State Street, Boston, MA 02109 Underwriter of Pioneer mutual funds, Member SIPC.

Not FDIC insured | May lose value | No bank guarantee Amundi Asset Management US, Inc. Form CRS Amundi Distributor US, Inc. Form CRS

EXP-2023-6-2-ADID-2205544-1Y-T

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Gs Dynamic Municipal Income Fund

Seeks a high level of current income that is exempt from regular federal income tax

Overall Morningstar Rating as of 07.31.22

Standardized 30-Day Subsidized Yield

The Morningstar RatingTM is calculated for funds with at least a 3-year history based on a risk-adjusted return measure that accounts for variation in a funds monthly excess returns. Exchange-traded funds and open-ended mutual funds are considered a single population. In each category, the top 10% = 5 stars, next 22.5% = 4 stars, next 35% = 3 stars, next 22.5% = 2 stars, and bottom 10% = 1 star. Overall rating is derived from a weighted average of the returns associated with its 3-, 5-, and 10-year rating, excluding all sales charges. Weights are based on the # of months of total returns: 100% 3-year rating for 36-59 months, 60% 5-year rating/40% 3-year rating for 60-119 months, and 50% 10-year rating/30% 5-year rating/20% 3-year rating for 120 or more months. Rankings for other share classes may vary. The returns represent past performance. Past performance does not guarantee future results. The Funds investment return and principal value will fluctuate so that an investors shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted above. Please visit our Web site at: www.GSAM.com to obtain the most recent month end return.

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