Why Funds Make Sense for Municipal Bonds

By Tom Lydon, ETF Trends

When looking into the municipal bond market, fixed-income investors may be better off with a muni bond funds, instead of trading individual debt securities.

Brokers typically mark up the price of municipal bonds they sell to individual investors, writes Aaron Kuriloff for the Wall Street Journal.

However, the markups that funds pay are typically lower since fund companies buy in bulk and are more familiar with the market.

Consequently, Christine Benz, director of personal finance at investment researcher Morningstar, argues that most people should use munis-related bond funds, adding that reducing fees is “absolutely crucial” to efficiently maximize gains from a low-yielding asset like munis.

Muni bond investors can also enjoy the instant diversification benefits of owning a muni fund. The funds spread risk by holding multiple bonds from many different issuers across different states. The large portfolio of muni debt securities help diminish the negative effects of a single issuer default.

Allan Roth, a financial adviser at Wealth Logic, argues that a broad muni fund helps diversify away from an investor’s local economy and the market for his or her home. However, potential investors should be aware that local tax breaks would only apply to a portion of a broad muni fund that come from their home state.

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The D2 Capital Management Tax Free Income Portfolio is currently yielding 4.41% (Trailing 12 month Tax Equivalent Yield at 28% Tax Bracket, as of 17 November 2014).  Year to date the portfolio is up 8.71%

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