Wealthy investors have a healthy appetite for municipal bonds, a good sign for funds like the Vanguard Tax-Exempt Bond ETF (VTEB ).
One of the prime reasons for the move is municipal bonds can act as a safe haven from increasing tax rates.
“Wealthy investors are shoveling more money into municipal-bond exchange-traded funds as they seek shelter from expected higher tax rates,” a Financial Advisor article said. “Municipal-bond ETFs have already experienced $13.8 billion in net inflows this year. The current trajectory is set to outpace the $14.5 billion gathered by muni-bond ETFs for all of 2020.”
“The U.S. Senate recently approved a $1 trillion infrastructure spending package,” the article added further. “That’s on top of the $1.9 trillion Covid-19 relief bill passed earlier this year, plus $2.2 trillion more spending via the CARES Act in 2020. The surge in government spending has alarmed many affluent households and financial advisors who are bracing for higher income tax rates.”
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. MUB seeks to track the investment results of the S&P National AMT-Free Municipal Bond Index, which also measures the performance of the investment-grade segment of the U.S. municipal bond market.
The sampling approach means that both funds hold a subset of bonds within the index to replicate the debt’s yield, duration, and credit quality. This method allows the funds to avoid trading expensive bonds that could harm performance. It also minimizes tracking errors.
Tax-Free Income Benefits
One of the other benefits that appeal to the wealthy is tax-free income benefits. Municipal bonds can be a prime way to park capital in order to earn a return without the tax burden.
“Income generated from municipal bonds is exempt from federal taxes and from state income taxes, so long as the bonds purchased are from a taxpayer’s home state. In certain cases, income from in-state municipal bonds could be subject to state taxes,” the article said.
Tax benefits are attracting more investors to municipal bonds, and the ETF industry stands to benefit.
“Muni-bond ETFs that are exempt from the federal alternative minimum tax, or AMT, have become another popular target for investors,” the article added. “With $8.7 billion in combined assets, ETFs tied to municipal bonds with AMT-free income represents the largest segment within the overall municipal-bond ETF category.”
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