Getting core bond exposure to investment-grade debt holdings might be the default move for investors who want to simply diversify their portfolios of equities, but municipal bond exposure offers its own benefits that investors should also consider. U.S. News offered three advantages to municipal bonds that investors may not be aware of.
With investors already knee-deep into 2022, it’s hard to believe that the year will soon be coming to a close. As such, it’s never too late to try to minimize the year’s tax burden when April 2023 is around the corner.
Municipal bonds can provide tax-free income, making it an ideal source of cash flow for high net worth individuals. Its relative safety compared to other riskier assets also make it an ideal option for retirees.
“Investing in municipal bonds doesn’t incur federal income tax and, in certain cases, state and local income taxes,” the article noted.
As mentioned, there’s relative safety inherent in municipal bonds versus corporate bonds, for example. A local government will hardly ever fall asunder, whereas a company is more at risk of doing so, giving munis the advantage when it comes to assessing credit risk.
“Should an investor be concerned with the level of risk on a security, municipal bonds are considered a low-risk investment and have historically offered a good track record of returns,” the article noted.
Given their stability, this transfers over into their reliability as an income stream.
“When investors purchase municipal bonds, they are lending money to issuers who promise to pay a specified amount of interest – usually semiannually – and return of principal on a specific maturity date,” the article added.
Muni Exposure in 1 ETF
Rather than hold various municipal bond positions, consider the Vanguard Tax-Exempt Bond ETF (VTEB ). With a 0.05% expense ratio, the fund offers low-cost exposure to municipal debt.
VTEB tracks the Standard & Poor’s National AMT-Free Municipal Bond Index, which measures the performance of the investment-grade segment of the U.S. municipal bond market. This index includes municipal bonds from issuers that are primarily state or local governments or agencies whose interests are exempt from U.S. federal income taxes and the federal alternative minimum tax (AMT).
For more news, information, and strategy, visit the Fixed Income Channel.