While municipal bonds look attractive as traders continue to look forward to lower interest rates, investors will find there are multiple ways to enter this lucrative asset class. Muni bonds are beloved by wealthy investors because they provide income that is free of federal taxes. Additionally, investors who reside in the state in which the bond is issued receive income that is exempt from state taxes. These bonds are also expected to see some price appreciation once the Federal Reserve starts lowering interest rates, a boon for investors who already have them in their portfolios. Kathleen McNamara, regional strategist for UBS’s Americas chief investment office, said in an April 25 note: “With the rate cut postponed rather than cancelled, yields on high-quality municipal bonds are attractive at current levels. We are thinking about it.” “And there may also be capital gains as the year progresses.” “Pre-tax yields” could exceed 8%, suggesting an attractive opportunity, he said. ” However, it is not necessary to purchase individual munis to enter the market. Here are several ways to purchase and the pros and cons of each method. Different levels of buy-in and trade-offs There are several questions investors who want to enter the municipal bond market should consider. First, how much do you plan on purchasing? Individual municipal bonds are usually sold in units of $5,000, which may be a hurdle for investors who want to build a diversified portfolio of stocks. Because there is. Investors should also actively perform due diligence on these individual bonds. Open-end mutual funds and exchange-traded funds provide investors with access to a basket of bonds, with the underlying instruments having varying maturities and coupons, but with potentially manageable minimum investment amounts. there is. Consider that the Vanguard Intermediate Term Tax Exempt Fund (VWITX) has a minimum investment of $3,000 and includes over 13,000 municipal bonds. The 30-day SEC yield is 3.46% and the expense ratio is 0.17%. Investors should also consider time horizon when proceeding with a purchase. When an investor buys an individual municipal bond, they know that if they hold it to maturity, they will get their principal back, regardless of the vagaries of bond market prices during that time. Investors can also use individual stocks to build fixed income strategies. This includes a bond ladder that buys portfolios of different maturities and reinvests the proceeds from expired issues into new long-term bonds. On the other hand, municipal bond ETFs and mutual funds do not have a clear maturity date, and their prices may fluctuate while investors hold them. “If you want more diversification, you can also consider mutual funds and ETFs,” said Beth Foos, associate director of manager research and fixed income strategies at Morningstar. “But they can be volatile.” Liquidity needs are also a big factor, and individual bonds can be difficult to sell if investors need cash. “If you need to raise capital and liquidate before maturity, you may not get the best execution,” said James Ritsema, senior portfolio analyst at Baird. Meanwhile, investors in mutual funds and ETFs will find it easier to sell their holdings. Finally, investors should not forget about fees. Funds with the highest expenses end up eating into investors’ profits. Closed-End Funds Another way to enter the municipal bond space is to consider closed-end funds, which are traded on exchanges similar to mutual funds. However, the number of shares offered is limited. These funds offer a fixed number of shares and therefore trade at a discount or premium to their net asset value. It also uses leverage, which can increase returns but also introduces some volatility. Some of these funds hold municipal bonds and trade at deep discounts to their net asset values, making them potentially attractive purchases. “If the Fed reverses course and starts lowering rates and inflation remains contained, that bodes well for long-term asset classes,” said John Brown, senior investment analyst at RiverNorth. He noted that “a number of municipal closed-end funds” are trading at double-digit discounts. Investors participating in the closed-end fund space should be aware that the fund’s expense ratio can exceed 1%. You should also be aware that the Fund’s use of leverage may magnify the downside.
There are various ways to access this asset and earn tax-free income
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