Case Study: Revisiting Tax Exempt Bonds

Case Summary

With the city of Harrisburg, PA on the verge of bankruptcy and other cities and states in financial trouble, investors should be revisiting the role of tax-exempt bonds in their portfolios.   ETFs offer investing possibilities to investors seeking tax-exempt income without the risk of exposure to a single municipality or state.

Analysis

Exchange traded funds are a great way to gain diversified exposure to tax-exempt bonds.  Several funds provide diversification across geographies and some even offer weekly income.

Portfolio Recommendations

The $1.8 billion S&P National AMT-Free Municipal Bond Fund (MUB) has nearly 700 holdings.  The largest position represents only 1.18% of the portfolio.  The 30-Day SEC yiled is 3.21% and the expense ratio is 0.25%.

The $900 million SPDR Barclays Capital Municipal Bond ETF (TFI) has 291 holdings, a 30 Day SEC Yield of 3.23% and a net expense ratio of 0.20%.

For tax-free weekly income, investors should consider the $840 million VRDO Tax-Free Weekly Portfolio (PVI). The fund tracks an index of tax-exempt Variable Rate Demand Obligations (VRDOs) issued by municipalities in the United States. VRDOs are high-quality, floating-rate bonds that provide investors with tax-exempt income.

See the ETF Directory for additional investing choices or a complete list of tax-exempt ETFs.