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Trump Tax Plan & Muni Bond ETFs: What Investors Need to Know

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Muni bond investing is turning out to be a profitable bet for investors at the current level but may lose luster if the Trump tax plan materializes. As we all know, municipal bonds are excellent choices for investors seeking a steady stream of tax-free income.

But with President Trump pledging for lower personal income tax rates, investors’ desire for a tax shelter in munis may be quelled. As per the tax overhaul plan, Trump has suggested a 15% corporate tax rate compared with the present 35% (read: 5 ETFs to Buy if Trump Tax Reform is Enacted by Year End).

The administration has proposed three tax brackets with rates of 35%, 25%, and 10%, down from the current seven brackets, “double the standard deduction that Americans can claim on their tax returns and [a] repeal [of] the estate tax and alternative minimum tax.”

Though most market participants are not sure if Congress will pass any of these tax proposals, the Trump administration sees the completion of “the biggest overhaul of the tax code since President Ronald Reagan by the end of the year,” if we go by the statements of Treasury Secretary Steven Mnuchin.

How Will Tax Reform Impact Muni Bond ETFs

If enacted, the tax cuts would simply replace the need for muni bond investing by taxable treasuries or corporate bonds. Plus, Trump had proposed to increase infrastructure spending. If this happens, munis will be forced to issue more bonds offering higher yields amid dwindling demand (read: What Lies Ahead for Muni Bond ETFs in the Trump Era?).

As a result, the fervor for muni bond investing backtracked after Trump’s win in November. However, the space bounced back lately as Trump trade wavered in recent sessions thanks to overvaluation concerns, policy uncertainty and the President facing a bunch of allegations. iShares National Muni Bond ETF MUB advanced over 1.3% in the last three months (as of May 23, 2017) (read: Sector ETF Winners and Losers on Trump Controversy).

Another factor that could somewhat check the likely sell-off in munis space (from Trump Tax plan) is cash supplies. As per Bloomberg, “the state and local government debt market will shrink by $39.5 billion over June, July and August as bonds mature faster than they’re issued. At the same time, investors will receive $44 billion of interest payments, according to Citigroup Inc. -- resulting in nearly $84 billion available to be reinvested.”

One-Week Scorecard of Muni ETFs

In the last one week (as of May 23, 2017) when Trump-related controversy gripped the market, several muni bond ETFs were in fine fettle. Deutsche X-trackers Muni Infras Revn Bd RVNU deserves special mention for its 0.9% returns followed by PowerShares National AMT-Free MuniBd ETF (PZA, VanEck Vectors AMT-Free Intermediate Muni ETF (ITM - Free Report) and VanEck Vectors AMT-Free Long Municipal Index ETF MLN.

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