Municipal Bond ETFs offer another way to invest in the muni market besides purchasing the bonds outright or investing in a municipal bond fund.
Like municipal bond mutual funds, they consist of a basket of municipal bonds and share the same objective of offering investors a diversified portfolio. The ETF market has exploded in recent years and most major brokers offer a basket of different muni ETFs to choose from.
So, why would you invest in a muni ETF versus a mutual fund? Like all ETF versus mutual fund decisions, the main difference is the cost. ETFs are usually not actively managed and have very low management fees. For example, PIMCO's Intermediate Muni Bond Strategy ETF (MUNI) has an expense ratio of .35%. PIMCOs Municipal Bond Fund A (PMLAX) has a net expense ratio of .750%. When the yield is in the 3-4 range, which is currently typical of municipal bond funds or ETFs, then the extra .35% of expense is significant.
If you plan on investing on a periodic basis, then ETFs may be at a disadvantage over bond mutual funds. Mutual funds generally don't charge fees for adding money. ETFs are bought and sold like stocks and depending on which broker you use, this can become expensive. If you want to invest in an ETF and plan to buy and sell periodically, then be sure to use a discount broker.
Municipal Bonds ETFs and the AMT
Before investing in municipal bonds of any kind, investors should be aware of how they might be impacted by the Alternative Minimum Tax. Private issue municipal bonds, which are used to pay for private facilities like sports stadiums and hospitals are not tax exampt under the AMT. For more on this, please visit our municipal bond AMT section.
Advantages of Municipal Bond ETFs
- Tax benefit (like all municipal bonds)
- Recurring income (from bond dividends)
- Diversified bond portfolio
- Low management expenses
- Typically safer than corporate bonds
Disdvantages of Municpal Bond ETFs
- May be subject to AMT, wiping out tax benefit.
- Lower returns than corporate bonds
- Higher transaction fees
Purchasing Municipal Bond ETFs
Municipal Bond ETFs can be bought and sold through a broker, just like a stock.
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