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Democrats Favoring Tax Hikes: Muni Bond ETFs to Soar?

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Though it is still a year away, the race toward presidential election has started. Elizabeth Warren wants to levy a 2% annual tax on household wealth above $50 million, and a 6% annual tax on net worth above $1 billion. Bernie Sanders has targeted the top 0.1% and Joe Biden is looking to reverse President Donald Trump’s tax cuts. In short, all Democrat candidates are clamoring for a tax hike one way or the other.

So, if Trump does not make it to the second term this year, we may end up seeing in a hike in taxes. And this could be great news of muni bonds.

Muni Bonds On Fire This Year

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

Though tax reform (or cuts) initially put muni bonds under pressure even in the Trump administration, limitation on the deductibility of state and local taxes (the SALT deduction) from federal taxes for taxpayers of some states kept demand for munis strong. Taxpayers of seven states (California, Connecticut, Minnesota, New Jersey, New York, South Carolina and Wisconsin) were not benefited that much by the tax overhaul (read: 4 Reasons Why Muni Bond ETFs Are Rallying in 2019).

Net new cash flows into municipal bond funds witnessed the best start to a year since record-taking began in 1992. And the space is on a pace to witness the highest inflows on record, topping the previous high set in 2009.

What If Democrats Make It in 2020

Per Bloomberg, muni securities delivered outsize returns after President Bill Clinton took office and went on to hike the top marginal tax rate. So, the $3.8-trillion muni bond market will be in great focus in 2020 – the election year.

The Bloomberg article went on to elaborate that “about 42% of the $60 billion of tax-exempt interest paid in 2017 went to Americans who make more than $500,000 a year, with another $22 billion paid to those earning between $100,000 and $500,000, according to Internal Revenue Service statistics.” So, any prospect of a tax hike would drive demand for munis.

Below we highlight some of the high-yielding muni bond ETFs, which have added solid returns in the past week (as of Nov 20, 2019) (see all muni bond ETFs here).

First Trust Municipal High-Income ETF FMHI – Yield 3.36%

VanEck Vectors Short High-Yield Municipal Index ETF (SHYD - Free Report) – Yield 3.21%

Invesco National AMT-Free Municipal Bond ETF PZA – Yield 2.83%

VanEck Vectors AMT-Free Long Municipal Index ETF MLN – Yield 2.81%

Franklin Liberty Intermediate Municipal Opportunities ETF FLMI – Yield 2.78%

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