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As Tax Day is nearing, Americans are looking for ways to lower their tax burden. They need to file their income tax returns with the Internal Revenue Service by April 18. There are various tax-exempt investment schemes including municipal bonds and certain money market funds, which one can invest in to reduce their tax burden. Specifically, municipal bonds are excellent choices for investors seeking a steady stream of tax-free income.
Inside the Appeal of Muni Bonds
Usually, the interest income from munis is exempt from federal tax and may also not be taxable per state laws, making these especially attractive for investors in the high tax bracket looking to reduce their tax liability.
This is totally different from interest on Treasury and corporate bonds that are taxed as regular income. Apart from investors’ desire for a tax-shelter, improving fiscal health of many municipal bond issuers make a rewarding combination.
The peak of the pandemic was worrying for muni bonds. Since entities like airports, schools and colleges were closed during the lockdown, munis were severely hurt. Lower levels of tax collections were a concern. But now, with economies returning to the pre-Covid level, munis have a brighter outlook. In any case, bonds backed by states and cities have the lowest default risks.
Yields are normally higher in muni bonds than treasuries. Per an article published on dividend.com in November 2022, U.S. Treasury yields remained higher than they’ve been in years due to rapid Fed rate hikes in the past one year. The 10-year U.S. treasury edged past 4% several times lately. The municipal-to-Treasury yield ratio was also much higher than historical averages at about 86%, hinting at an attractive relative yield.
Against this backdrop, below we highlight a few muni bond ETFs that offered decent returns past month with decent yields.
ETFs in Focus
Xtrackers Municipal Infrastructure Revenue Bond ETFRVNU – Up 3.44% Return; 2.80% Yield
VanEck Vectors AMT-Free Long Municipal Index ETF MLN – Up 2.97% Return; 2.74% Yield
Rareview Tax Advantaged Income ETF (RTAI - Free Report) – Up 2.83% Return; 3.62% Yield
SPDR Nuveen Bloomberg Municipal Bond ETF (TFI - Free Report) – Up 2.79% Return; 1.96% Yield
Invesco BulletShares 2031 Municipal Bond ETF (BSMV - Free Report) – Up 2.64% Return; 2.30% Yield
IQ MacKay Municipal Insured ETF (MMIN - Free Report) – Up 2.59% Return; 3.19% Yield
Any Wall of Worry?
Some states like California have poor fiscal health at present. This could be due to California’s drawing of less personal income tax revenue than it expected before. California's state finances—mainly, its personal income taxes on capital gains—are affected by stock market weakening and gaining. Real incomes of high-income Californians—who have considerable equity income and pay the highest marginal tax rates—have grown over time. This has made California’s budget volatility and average annual state revenue growth susceptible to the global stock market, mainly Wall Street. As markets performed very bad last year, California’s financial health is sure to struggle.
However, markets may stage a recoil in the coming days due to chances of a less-hawkish Fed. This could beneficial for the munis indirectly. The crisis in the regional banking space is another concern, though the FDIC has arrested the turmoil quite efficiently and timely.
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Time to Buy Muni Bond ETFs Now?
As Tax Day is nearing, Americans are looking for ways to lower their tax burden. They need to file their income tax returns with the Internal Revenue Service by April 18. There are various tax-exempt investment schemes including municipal bonds and certain money market funds, which one can invest in to reduce their tax burden. Specifically, municipal bonds are excellent choices for investors seeking a steady stream of tax-free income.
Inside the Appeal of Muni Bonds
Usually, the interest income from munis is exempt from federal tax and may also not be taxable per state laws, making these especially attractive for investors in the high tax bracket looking to reduce their tax liability.
This is totally different from interest on Treasury and corporate bonds that are taxed as regular income. Apart from investors’ desire for a tax-shelter, improving fiscal health of many municipal bond issuers make a rewarding combination.
The peak of the pandemic was worrying for muni bonds. Since entities like airports, schools and colleges were closed during the lockdown, munis were severely hurt. Lower levels of tax collections were a concern. But now, with economies returning to the pre-Covid level, munis have a brighter outlook. In any case, bonds backed by states and cities have the lowest default risks.
Yields are normally higher in muni bonds than treasuries. Per an article published on dividend.com in November 2022, U.S. Treasury yields remained higher than they’ve been in years due to rapid Fed rate hikes in the past one year. The 10-year U.S. treasury edged past 4% several times lately. The municipal-to-Treasury yield ratio was also much higher than historical averages at about 86%, hinting at an attractive relative yield.
Against this backdrop, below we highlight a few muni bond ETFs that offered decent returns past month with decent yields.
ETFs in Focus
Xtrackers Municipal Infrastructure Revenue Bond ETF RVNU – Up 3.44% Return; 2.80% Yield
VanEck Vectors AMT-Free Long Municipal Index ETF MLN – Up 2.97% Return; 2.74% Yield
Rareview Tax Advantaged Income ETF (RTAI - Free Report) – Up 2.83% Return; 3.62% Yield
SPDR Nuveen Bloomberg Municipal Bond ETF (TFI - Free Report) – Up 2.79% Return; 1.96% Yield
Invesco BulletShares 2031 Municipal Bond ETF (BSMV - Free Report) – Up 2.64% Return; 2.30% Yield
IQ MacKay Municipal Insured ETF (MMIN - Free Report) – Up 2.59% Return; 3.19% Yield
Any Wall of Worry?
Some states like California have poor fiscal health at present. This could be due to California’s drawing of less personal income tax revenue than it expected before. California's state finances—mainly, its personal income taxes on capital gains—are affected by stock market weakening and gaining. Real incomes of high-income Californians—who have considerable equity income and pay the highest marginal tax rates—have grown over time. This has made California’s budget volatility and average annual state revenue growth susceptible to the global stock market, mainly Wall Street. As markets performed very bad last year, California’s financial health is sure to struggle.
However, markets may stage a recoil in the coming days due to chances of a less-hawkish Fed. This could beneficial for the munis indirectly. The crisis in the regional banking space is another concern, though the FDIC has arrested the turmoil quite efficiently and timely.