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Play 4 Muni Mutual Funds as Bond Demand Outstrips Stocks
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Demand for bond funds outpaced those of stocks this year, with weak global growth, low inflation and central banks not hiking rates helping them to gain traction. Hefty price tags and a welter of political risks suggest that stocks could be in for a bumpy ride ahead.
Hence, it makes sense to invest in bond funds, especially municipal bonds or “munis.” Notably, munis posted respectable gains this year and raked in considerable cash. In addition, income earned form these securities is exempt from federal taxes and in many cases from state taxes as well.
Stock Funds Suffer Outflows
Even though stocks continue to hover near all-time highs, investors are cashing out of stock mutual funds. For the week ended Aug 3, domestic stock funds suffered a net outflow of $7.4 billion, according to the latest data from the fund industry group ICI. Banking behemoth, JPMorgan Chase & Co. (JPM - Free Report) also reported that $47 billion was withdrawn from global equity funds so far this year, since 2008.
These reports say that investors are nervous about stocks, and the primary reason behind this is high valuation. The S&P 500’s trailing price-to-equity ratio jumped to 19.5 this week, the highest since 2010. Lackluster earnings results and a range of political risks including the U.S. elections are also expected to weigh on the stock market. Tepid global growth and inflation, and central banks’ disposition to keep monetary policies loose aren’t sufficient to push stocks, while it is enough to boost bonds (Read: How Inflation And Interest Rates Affect Bonds).
Bonds Surpass Stocks
Central banks in Europe and Japan are expected to keep their monetary policy loose in order to strengthen their economies. In the U.S., more than half of the investors still believe that the Fed won’t raise rates until next year, according to the CME group. Meanwhile, the central bank in Europe has already started purchasing high-grade corporate bonds, which lifted such markets, while it also encouraged investors to buy higher-yielding U.S. bonds.
Domestic bond funds took in almost $8 billion in the week ending Aug 3, the highest weekly inflow since the week ended June 24, 2015, according to the ICI. When it comes to global bond funds, investors have also poured in $202 billion, according to JP Morgan. In fact, bonds have already outperformed stocks this year. U.S. investment-grade bonds reaped in 9.2% this year, while U.S. high-yield bonds and emerging market dollar dominated debt gave returns of more than 13%, according to Barclays PLC (BCS - Free Report) .
“Munis” Rake in Cash for 13 Straight Months
Municipal bond mutual funds posted a year-to-date return of about 6%, as of July 31, 2016. But, what makes such funds stand out is that “munis” posted 13 months of positive returns, their longest winning streak in 24 years, according to a report published by BlackRock, Inc. (BLK - Free Report) earlier this week. Through such periods, munis now see net inflows totaling roughly $51 billion.
This also showed that investors have shrugged off dismal headlines like deteriorating credit quality in Puerto Rico and of other fiscally challenged issuers that had cast doubts about whether munis will continue their bullish run in 2016. In fact, default rates in the muni market are at historically low levels, which should encourage investors to add muni funds to their portfolio.
Best 4 Municipal Bond Mutual Funds for Solid Returns
As mentioned above, investment in municipal bond mutual funds will be a prudent choice because of their positive return streak and consistent net inflows. Moreover, returns from municipal bond mutual funds are tax exempted, while such funds have “the ability to act as high-quality, low-volatility portfolio diversifiers,” the BlackRock report noted (read: What is a Municipal Bond Fund?).
We have chosen four such mutual funds that possess a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), have positive 3-year and 5-year annualized returns, minimum initial investments within $5000 and carry low expense ratios.
AB High Income Municipal A (ABTHX - Free Report) invests a major portion of its net assets in municipal securities that pay interest exempt from federal income tax. ABTHX’s 3-year and 5-year annualized returns are 9.6% and 8.1%, respectively. ABTHX carries a Zacks Mutual Fund Rank #2. Annual expense ratio of 0.86% is lower than the category average of 0.94%.
Invesco High Yield Muni A (ACTHX - Free Report) invests the majority of its net assets in municipal securities at the time of investment. ACTHX’s 3-year and 5-year annualized returns are 9.9% and 8.2%, respectively. ACTHX carries a Zacks Mutual Fund Rank #1. Annual expense ratio of 0.86% is lower than the category average of 0.94%.
American Century High-Yield Muni A (AYMAX - Free Report) invests a large portion of the fund's net assets in municipal securities with interest payments exempt from federal income tax. AYMAX’s 3-year and 5-year annualized returns are 7.6% and 6.7%, respectively. AYMAX carries a Zacks Mutual Fund Rank #1. Annual expense ratio of 0.85% is lower than the category average of 0.94%.
Fidelity Advisor California Muni Inc A (FCMAX - Free Report) invests the majority of its assets in investment-grade municipal securities whose interest is exempt from federal and California personal income taxes. FCMAX’s 3-year and 5-year annualized returns are 6.4% and 5.3%, respectively. FCMAX carries a Zacks Mutual Fund Rank #1. Annual expense ratio of 0.8% is lower than the category average of 0.89%.
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Play 4 Muni Mutual Funds as Bond Demand Outstrips Stocks
Demand for bond funds outpaced those of stocks this year, with weak global growth, low inflation and central banks not hiking rates helping them to gain traction. Hefty price tags and a welter of political risks suggest that stocks could be in for a bumpy ride ahead.
Hence, it makes sense to invest in bond funds, especially municipal bonds or “munis.” Notably, munis posted respectable gains this year and raked in considerable cash. In addition, income earned form these securities is exempt from federal taxes and in many cases from state taxes as well.
Stock Funds Suffer Outflows
Even though stocks continue to hover near all-time highs, investors are cashing out of stock mutual funds. For the week ended Aug 3, domestic stock funds suffered a net outflow of $7.4 billion, according to the latest data from the fund industry group ICI. Banking behemoth, JPMorgan Chase & Co. (JPM - Free Report) also reported that $47 billion was withdrawn from global equity funds so far this year, since 2008.
These reports say that investors are nervous about stocks, and the primary reason behind this is high valuation. The S&P 500’s trailing price-to-equity ratio jumped to 19.5 this week, the highest since 2010. Lackluster earnings results and a range of political risks including the U.S. elections are also expected to weigh on the stock market. Tepid global growth and inflation, and central banks’ disposition to keep monetary policies loose aren’t sufficient to push stocks, while it is enough to boost bonds (Read: How Inflation And Interest Rates Affect Bonds).
Bonds Surpass Stocks
Central banks in Europe and Japan are expected to keep their monetary policy loose in order to strengthen their economies. In the U.S., more than half of the investors still believe that the Fed won’t raise rates until next year, according to the CME group. Meanwhile, the central bank in Europe has already started purchasing high-grade corporate bonds, which lifted such markets, while it also encouraged investors to buy higher-yielding U.S. bonds.
Domestic bond funds took in almost $8 billion in the week ending Aug 3, the highest weekly inflow since the week ended June 24, 2015, according to the ICI. When it comes to global bond funds, investors have also poured in $202 billion, according to JP Morgan. In fact, bonds have already outperformed stocks this year. U.S. investment-grade bonds reaped in 9.2% this year, while U.S. high-yield bonds and emerging market dollar dominated debt gave returns of more than 13%, according to Barclays PLC (BCS - Free Report) .
“Munis” Rake in Cash for 13 Straight Months
Municipal bond mutual funds posted a year-to-date return of about 6%, as of July 31, 2016. But, what makes such funds stand out is that “munis” posted 13 months of positive returns, their longest winning streak in 24 years, according to a report published by BlackRock, Inc. (BLK - Free Report) earlier this week. Through such periods, munis now see net inflows totaling roughly $51 billion.
This also showed that investors have shrugged off dismal headlines like deteriorating credit quality in Puerto Rico and of other fiscally challenged issuers that had cast doubts about whether munis will continue their bullish run in 2016. In fact, default rates in the muni market are at historically low levels, which should encourage investors to add muni funds to their portfolio.
Best 4 Municipal Bond Mutual Funds for Solid Returns
As mentioned above, investment in municipal bond mutual funds will be a prudent choice because of their positive return streak and consistent net inflows. Moreover, returns from municipal bond mutual funds are tax exempted, while such funds have “the ability to act as high-quality, low-volatility portfolio diversifiers,” the BlackRock report noted (read: What is a Municipal Bond Fund?).
We have chosen four such mutual funds that possess a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), have positive 3-year and 5-year annualized returns, minimum initial investments within $5000 and carry low expense ratios.
AB High Income Municipal A (ABTHX - Free Report) invests a major portion of its net assets in municipal securities that pay interest exempt from federal income tax. ABTHX’s 3-year and 5-year annualized returns are 9.6% and 8.1%, respectively. ABTHX carries a Zacks Mutual Fund Rank #2. Annual expense ratio of 0.86% is lower than the category average of 0.94%.
Invesco High Yield Muni A (ACTHX - Free Report) invests the majority of its net assets in municipal securities at the time of investment. ACTHX’s 3-year and 5-year annualized returns are 9.9% and 8.2%, respectively. ACTHX carries a Zacks Mutual Fund Rank #1. Annual expense ratio of 0.86% is lower than the category average of 0.94%.
American Century High-Yield Muni A (AYMAX - Free Report) invests a large portion of the fund's net assets in municipal securities with interest payments exempt from federal income tax. AYMAX’s 3-year and 5-year annualized returns are 7.6% and 6.7%, respectively. AYMAX carries a Zacks Mutual Fund Rank #1. Annual expense ratio of 0.85% is lower than the category average of 0.94%.
Fidelity Advisor California Muni Inc A (FCMAX - Free Report) invests the majority of its assets in investment-grade municipal securities whose interest is exempt from federal and California personal income taxes. FCMAX’s 3-year and 5-year annualized returns are 6.4% and 5.3%, respectively. FCMAX carries a Zacks Mutual Fund Rank #1. Annual expense ratio of 0.8% is lower than the category average of 0.89%.
Want key mutual fund info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing mutual funds, each week. Get it free >>