Use Municipal Bond Funds to Diversify a Portfolio

By Tom Lydon, ETF Trends

With the equities market seesawing again, investors may want to revisit fixed-income assets like municipal bond funds for a more conservative play.

Tax free municipal bonds may not be the most interesting investment theme, but they provide an investor’s portfolio with a safer play during market swings, writes Dan Moskowitz for Investopedia.

Looking at the potential risk profile, the average default rate of municipal bonds was 0.10% over 2014. In contrast, investment grade corporate bond default rates were about 0.50% over the past several years. Additionally, speculative-grade or junk bonds have a historical default rate of 4.5%.

The credit risk comes as no surprise since assets with greater returns typically come with greater risks.

The munis market has been supported by a growing economy and slower issuance of new debt. As the economy expanded, employment rates are up and tax revenue has been on the rise. Meanwhile, muni bond funds have been steadily gained as high demand outpaced a slower supply of new debt. Although, municipalities have been increasing new issuance this year.

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The D2 Capital Management Tax Free Income Portfolio is currently yielding 4.458% (Trailing 12 month Tax Equivalent Yield at 28% Tax Bracket, as of 25 March 2015).  Year to date the portfolio is up 1.07%

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