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New Cash Alternatives --- Tax Free Municipal Bond ETFs

Article Submitted by: Marc Freedman
Stocks - Options - Mutual Funds


Municipal bonds used be a clumsy investment for most people, especially when one had to buy them individually, usually at $50K and above, from brokers. Then came mutual funds which offered portfolios and charged, with the exception of Vanguard, fairly large fees and were far from liquid. Now, the EFT phenomenon has come to municipals and it is going to be explosive.

 

Submitted: Oct 20, 2007    Views: 1032    Comments: 0    Likes: 21   


Municipal bonds used be a clumsy investment for most people, especially when one had to buy them individually, usually at $50K and above, from brokers.   Then came mutual funds which offered portfolios and charged, with the exception of Vanguard, fairly large fees and were far from liquid.  Now, the EFT phenomenon has come to municipals and it is going to be explosive.  

 

There are some six ETFs funds at the moment through Barkley, State Street and Power Shares.  Within months there will be many, many more.  Municipals are federally tax free, and state tax free when they are of the state of residence.  It won't be long before there are ETFs cut by state, by ratings, by long and short term, etc.  It is just about to happen.  And, it is a perfect vehicle for new and safe returns.  In fact, municipals have been doing particularly well over the last year, competing well against treasuries and CDs.

 

That is what the future holds.  Small and larger investors, looking for safe places to park cash, now have a new and very attractive alternative.  I have invested in municipals for years, but ETFs offer a far better opportunity to play this the bond market in new and attractive ways, especially as an alternative to cash holdings.

 

This article by Anand in the WSJ is a good one on this subject:  http://online.wsj.com/article/SB119283727030365518.html?mod=todays_us_money_and_investing

 

He doesn’t quite see the explosive growth that is about to happen.  I for one expect to be a big user of these new cash alternatives.  The only discipline I recommend is that one buys funds of only triple A rated bonds that are also insured.  When you do that, you are extremely well protected.  And, triple A insured bonds provide almost as much income as less insured ones. 


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