Recent market turmoil has investors looking for income. For some, municipal bonds may be the solution. The muni market has been beaten this year, with net weekly inflows into mutual and exchange-traded funds negative for most of 2022, according to data from Refinitiv Lipper. Yet their returns and tax benefits can make them an attractive investment. Debt securities are issued by government entities, such as a city or state, and raise funds for public projects, such as building roads or schools. They are generally exempt from federal taxes on interest and may avoid state and local levies, depending on where you live. “States are in great shape to repay their obligations, which makes municipal security even better than it has ever been,” said certified financial planner David Sheaff Gilreath, partner and chief investment officer at Sheaff. Brock, based in Indianapolis. Investment Advisors. Jason Ware, head of municipal bond trading at InspereX, has seen a “significant increase” in buying and selling of fixed income assets over the past two to three weeks. “Uncertainty about rising interest rates has led to redemptions in municipal bond funds,” he explained. “This has been accompanied by a busier new issuance schedule leading up to the imminent Fed decision, creating supply pressure [and] nominal yields and credit spreads rise sharply, making them much more attractive. “The tax advantages make munis especially attractive to high earners in high income states. These tax savings are even more critical in a time when stock market returns are scarce. “We always like to buy municipal bonds,” said said CFP Ian Weinberg, CEO of Family Wealth and Pension Management in Woodbury, New York. “When rates were really low, it wasn’t as exciting, but today it’s good business. Whenever we have the opportunity to add municipal bonds now, we do so.” A good signal to buy is when municipal yields over a particular duration are at least 85% of corresponding Treasury yields, he said. he said. That’s because with a Treasury, you pay tax on your interest income. So even if a well-rated bullion bond of the same duration has a lower yield, you can still earn more since it is generally not taxed.For example, a 12-year California tax-exempt bond paying a 4% semi-annual coupon, with essential service or general bond-type support, can earn you a yield of 3.7%, InspereX’s Ware said, equivalent to a taxable yield of 6.25%.Meanwhile, the 10-year Treasury currently yields just under 3.7%.How to buy munis For investors looking to enter the e munis market, there are several ways to do this. , you can use a broker, hire an investment manager, or trade directly through a self-directed online account. For example, you can go to the Fidelity Investments website and access over 50,000 municipal bonds as new issues or through brokers in the secondary market. However, if you choose to make your own direct purchases, be sure to do your homework, said Richard Carter, vice president of fixed income at Fidelity. “For investors considering a strategy that incorporates municipal bonds, they should first make sure they understand these offerings and how they fit into their overall financial plan,” Carter said. Fidelity also offers bond mutual funds and exchange-traded funds, as well as separately managed municipal accounts. Ware and Weinberg do not advise going it alone when it comes to buying individual municipal bonds. There are so many different issuers and bond choices, and there are credit ratings to consider. There are also price differentials, with small investors generally being at a disadvantage. “You don’t want to be the bondholder who got hungry for extra yield and bought the wrong bond,” Weinberg said. They suggest working with a professional who can handle the account. You can also get exposure to muni bonds through a mutual fund or ETF. Those who want a wide range of bond exposures, such as maturity, sector and credit, and who have limited funds could consider investing in a mutual fund or ETF, according to the Securities Regulatory Council. municipal securities. Individual Bonds vs. Funds When buying individual municipal bonds, work with a financial advisor or bond manager and focus on securities with good credit quality, such as general bond, voter approval and essential services, suggests Ware, who is based in San Francisco. Fees vary, with managers typically charging a percentage of assets under management. The advantage of owning bonds over investing in a fund is that if you hold the bond until maturity, you get your principal back, he explained. You can also control your credit risk and build your own portfolio. Having a separately managed account instead of a fund also allows you to stagger munis, investing in multiple bonds with different maturities. It’s a good strategy, especially when interest rates are rising, Ware said. As rates rise, you have capital maturing that you can reinvest at higher interest rates. There’s also good tax management in separately managed accounts, said Weinberg of Family Wealth and Pension Management. “If certain bonds are in a losing position, you can ask the manager to use those losses to reap tax losses against future gains in other investments,” he said. Weinberg uses an institutional municipal bond manager to manage its clients’ tax-exempt bond portfolios. However, he thinks this route is best for those investing at least a quarter of a million dollars, so they get the right diversification. For those with less money to invest, a mutual fund or ETF may be a better option, he said. “There’s nothing wrong with that. It just doesn’t give you as much certainty as you get from your municipal bond investment,” Weinberg said. Here are five municipal bond funds rated five stars by Morningstar. For Sheaff Gilreath, the funds are exactly where he wants to be. Specifically, he said he invests in closed-end bond funds because that’s where you can buy the cheapest bonds. “Many closed-end bond funds trade at prices below their net asset value,” he said. He likes the Putnam Managed Muni Income and Rivernorth Flexible Muni Income funds. Putnam has a payout yield of 6.37% and is currently trading at a 4.44% discount to its net asset value. Rivernorth is trading at a discount of 11.43% and has a payout yield of 8.26%. Whether you go it alone or use a separately managed fund, financial advisor or account, be sure to do your research and understand all the fees involved.
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