Why You Can’t Count Out California Muni Bond ETFs

California’s citizens took to the polls yesterday to vote on measures that would have helped close the $21 billion budget gap. They rejected all but one, but that doesn’t necessarily mean you should count out the state’s muni bond ETFs.

Stacey Vanek-Smith for Marketplace reports that the $21 billion-plus budget shortfall is on the line and deficits are not an option. If tax revenue drops, states either have to cut costs or find more money.

The voters in California voted on measures that would slash the budget for health care and education, two important areas that are already experiencing budgeting problems. The only measure approved was one barring pay increases for state officials, reports Reuters. Since the other measures didn’t pass, the U.S. Treasury may be the next place to search.

The government has already handed out around $150 billion to cover budgeting deficits, so where do we turn next? Perhaps a mix of issuing bonds, raising taxes and cutting budgets may work.

Are state muni bonds secure? Rob Williams at Charles Schwab points out that California’s bonds might have faced downgrades, but they still have strong investment-grade ratings.

Defaults on muni bonds issued by state and local governments have been historically low, but they are a risk to be mindful of nonetheless. Having an ETF with bonds of varying maturities can help diversify you and help lower these risks.

• PowerShares Insured California Muni Bond (PWZ): up 9.5% year-to-date; current yield 4.63%

• SPDR Barclays Capital California Muni Bond (CXA): up 7% year-to-date; current yield 4.17%



• iShares S&P California Muni Bond (CMF): up 4.8% year-to-date; current yield 3.58%

Comments

[Missing_Link:]

Kindly forgive me if, after the many years during which packages of worthless subprime mortgages were sold as AAA-rated securities, I am a bit skeptical of ratings nowadays.

May 21 03:31 PM

[Mad Hedge F...:]

there are better buys around. California voters resoundingly rejected all five out of six budgetary measures by an overwhelming two to one margin, setting the stage for a new financial crisis. Trashed at the polls were plans to create a rainy day fund, improve education, borrow from the state lottery, and pay for children’s services and mental health. Only prop 1F, freezing legislator pay raises during deficit years, passed. The state now has to immediately cut spending by $21 billion by laying off 10,000 teachers, 5,000 other state workers, and shortening the school year by seven days. It will raid every city and county government for additional cash. The state will also release 20,000 non violent state prisoners and suspend maintenance and construction on thousands of projects. My home town high school is closing their sports and music programs. If the state’s latest round of $6.5 billion in bond issues did not carry federal government guarantees, they would have been wiped out in the market. No doubt our well tanned, Austrian immigrant governor, Arnold Schwarzenegger, who was in Washington DC for a CAFE photo op with Obama, will be sent back to the gym to pump iron sooner than he thinks.

May 21 04:51 PM

[Missing_Link:]

Agreed, Mad Hedge Fund Trader. With all the investments doing so well in this market -- most notably gold, silver, commodities, China, Brazil, and inverse ETFs -- that I can't imagine why anyone would want exposure to a flailing banana republic like California.

May 21 07:39 PM

[searcher:]

The stop-gap ballot measures were mischaracterized as systematic 'solutions' and the voters were not deceived. They were in line with several political generations avoiding tough decisions by the executive and legislative branches. A bloated entitlement mindset as a holdover from the 'world's fifth largest economy' conceit met the reality of passive-aggressive anti-business practices over that same time frame.

May 22 01:12 PM