Time To Buy Muni Bond ETFs?

Municipal bond market or munis has been an area to watch out lately. As per the quarterly report of the Federal Reserve, the U.S. municipal bond market grew to $3.747 trillion in the first quarter from $3.719 trillion in the previous quarter. While mutual funds bought $78.5 billion of munis in the first quarter, ETFs added $7.1 billion. Property and casualty insurance companies, life insurance companies and U.S. banks also increased their municipal bond holdings (read: Muni Bond ETFs that Lately Hit a 52-Week High).

This trend has picked up momentum recently. In fact, a fresh high of $12 billion of new sales has entered the market last week. This surge in demand led to a fall in yield of munis. As per data from Municipal Market Data's benchmark scale, the yield on AAA-rated 30-year U.S. municipal bonds fell to an all-time low of 2.27% on Jun 9, 2016.

The buying has been triggered by global market turbulence and threats to the stability of the U.S. economy. Munis are comparatively more stable than equity or high yield bonds, making them the preferred choice in an economic climate marked by high levels of volatility.

Muni investors have also been encouraged by the dovish comments made by the Federal Reserve Chair Janet Yellen about the next rate hike that could come later in the year. Although had Yellen stated earlier this month that the U.S. economy was making progress, she remained silent on the timing of the impending hike. This coupled with shockingly downbeat job data for the month of May has led to speculations that a June rate hike is in all possibility off the table (read: Yellen Upbeat on Economy: Wining Sector ETFs).

Additionally, ultralow yields across the world have made munis increasingly attractive to investors as compared to other fixed-income assets. On Friday (June 10, 2016), 10-year note yields dropped to 1.639%, the lowest level in the last three years. Meanwhile, government bond yields in Japan, Germany and the U.K. also touched record lows as of June 10, 2016.

Municipal bonds are an excellent choice for investors seeking a steady stream of tax free income. Usually the interest income from munis is exempt from federal tax and may also not be taxable per state laws, making them especially attractive for investors in the high tax bracket, looking to reduce their tax liability.

With July being one of the biggest months for principal and coupon redemptions, the current trend for munis is expected to continue. Let’s take a look at some of the most popular muni ETFs, any of which could be interesting picks. These products have a decent Zacks ETF Rank of 3 or ‘Hold’ rating (see: all the Municipal Bonds ETFs here):

iShares National Muni Bond ETF MUB

The fund tracks the iShares National Muni Bond ETF and holds a large basket of 3,095 municipal bonds across a number of states and sectors. California munis take the top spot with nearly 23.1% of total assets, closely followed by New York at 20%.

The product focuses on mid- and long-term securities with average maturity of 5.47 years and effective duration of 4.74 years. MUB is one of the largest and most popular products in the national munis space with AUM of over $7 billion and solid average daily volume of more than 429,000 shares. The fund charges 25 bps in fees per year from investors and is up nearly 2.7% in the year-to-date time frame.

SPDR Nuveen Barclays (LON:BARC) Municipal Bond ETF (TO:TFI)

This product is also a popular choice for muni bond investing with AUM of $1.8 billion and an average volume of 275,000 shares a day. Holding 888 securities in its basket, the fund is spread across a variety of states with New York and California munis making up for a combined share of almost 40% (read: New SPDR Fixed Income ETF off to Solid Start).

The fund tracks the Barclays Municipal Managed Money Index. The ETF is slightly skewed toward the longer-term maturity securities, resulting in average maturity of 13.30 years and modified adjusted duration of 6.63 years. Expense ratio came in at 0.23%. TFI has gained nearly 3.4% so far this year.

PowerShares National AMT-Free Municipal Bond Portfolio (TO:PZA)

This product tracks the BofA Merrill Lynch National Long-Term Core Plus Municipal Securities Index. The fund has amassed $1.3 billion in its asset base while charging 28 bps in annual fees. Volume is solid as it exchanges nearly 288,000 shares per day.

With 317 securities in its basket, the fund is heavily tilted toward mid-term securities with effective duration of 5.91 years and modified duration of 5.25 years. The ETF gained nearly 5.1% in the year-to-date time frame.

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