Muni ETFs Rebound - Income To Stay Tax-Free In Budget Compromise

Includes: MUB
by: Tom Lydon

Now that the fiscal cliff appears to be behind us, municipal bonds and related exchange traded funds emerged from Congressional scrutiny unscathed and the debt securities could even begin to gain value again, some Wall Street analysts say.

In a recent note, Wells Fargo analysts said that there is "increased value for the tax exemption given the higher taxes on the wealthy and the new investment income tax, at least for now," Reuters reports.

However, it does not mean that muni bonds will be perfectly immune to tax scrutiny down the line as it is "still conceivable" for Congress to revisit the tax-exempt status.

Still, any bill that calls for limits to municipal bond's tax status would have to jump through a lot of hoops. Will Hepburn for Benzinga notes that if the federal government passed a law calling for taxation on the muni bond interest, it would test its constitutional muster in the Supreme Court. Moreover, this move would allow local governments to consider taxing federal properties, such as military bases, post offices and national forests, which do not pay taxes.

As interest over municipal bonds grow, the Securities and Exchange Commission issued a warning "to help educate investors about assessing credit risks they face when purchasing municipal bonds."

Investors are advised to "undertake their own independent review of the municipal bonds' risk" and to "look beyond the short-hand label given to a municipal bond, such as 'general obligation bond' or 'revenue bond,' or the bond's credit rating" when looking for a muni security.

"Investors should gather as much relevant information as they can before spending their hard-earned dollars on any investment," SEC Chairman Elisse Walter said, Bloomberg reports. "While I will continue to push for enhanced and more timely disclosure by those who issue municipal securities, investors should continue to learn all they can before purchasing them."

The iShares S&P National AMT-Free Municipal Bond ETF (NYSEARCA:MUB) bounced off its 200-day simple moving average in the weeks before the fiscal cliff deadline as investors weighed the likelihood of Congress changing the tax-exempt status on munis. The ETF is now testing its 50-day average.

Max Chen contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.