State Muni Bond ETFs Not Worth the Risk: Stick with the Federal Government

It's one thing to pursue a tax-free income stream from undervalued munis, particularly at the Federal level. After all, the U.S. government has the ability to print money to pay muni debt investors.

Not surprisingly, Powershares Insured National Muni (PZA) has been one of the bond market's stellar stand-outs in 2009 with 5% YTD tax-free appreciation alongside steady interest payments.

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Yet it's quite another thing to look for tax-free yield in a state where there is an increasing likelihood of default. That's right, Californians. A Federal bailout may not be in the cards. And what might be the easiest thing to do to close the $24 billion budget gap? Tell investors to take a hike!

You have state residents who recently voted to stop the increase in additional taxation. You have a legislature that is unable and/or unwilling to make enough cuts to spending. And you have bailout fatigue for citizens across the nation. It's the perfect storm for well-known doom-n-gloomers like Marty Weiss -- a prognosticator who calls a Cali default, "Inevitable!"

Granted, the repercussions of letting the world's 7th or 8th biggest economy in California go belly up may be astronomical and exponential. Such an event could send shivers clear across the globe. And in the final hour, the Obama Administration may indeed deem California "too big to fail."

Nevertheless, why would an ETF investor take this kind of risk? The potential reward for playing in the fireplace doesn't seem commensurate with the danger.

Two funds with marginal gains on the year include the iShares California Muni Bond Fund (CMF) and the SPDR California Muni Bond Fund (CXA). Understandably, they don't have the edge on more diversified vehicles like SPDR Muni Bond Fund (TFI) and/or iShares Short-Term National Muni (SUB).

Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.