Tax-Free ETFs Have Delivered Exceptional Results

Analysts have been wrong as often as they’ve been right. And few market-watchers were smart enough to talk about selling as a method for reducing the risk of loss.

Yet most did make a “call” early in ‘09 that muni bonds were a steal. In fact, many were yielding more than taxable equivalent bonds, which rarely, if ever, occurs.

A quick perusal of 8 of the top national tax-free ETF offerings shows that the tax-free income stream continues to be solid. Equally compelling, the capital appreciation on these muni bond ETFs have been sensational.

Tax-Free Income ETFs in 2009
		Annual Yield		YTD
VRDO Tax-Free Weekly (PVI)		2.5%		-0.2%
SPDR Capital Short Term Muni Bond (SHM)		2.5%		3.0%
Market Vectors Short Muni Index (SMB)		3.2%		1.5%
S&P National Municipal Bond Fund (MUB)		3.7%		3.9%
SPDR Capital Muni Bond (TFI)		4.1%		5.9%
Market Vectors Intermediate Muni Bond (ITM)		4.4%		6.7%
Market Vectors Long Muni (MLN)		4.8%		16.7%
Powershares Insured National Muni (PZA)		5.1%		11.5%

Long-term muni debt has been particularly attractive. For instance, Powershares Insured National Muni (PZA) tracks an insured long-term muni index comprised of AAA-rated, insured, tax exempt, long-term debt.

Considering the fact that PZA provides a reliable monthly income stream as well as diversification across the country’s highest rated/insured muni debt, a taxable equivalent yield for folks in the 28% bracket of better than 7% is hard to knock. Equally impressive is the fact that this fund was introduced at the start of the bear’s inception in October, 2007. Adjusted for distributions, PZA is up 3% in the same time frame that the S&P 500 is down -34%.

Remove the insurance shackles, and loosen up the credit quality by a notch to an AA average, and Market Vectors Long Muni (MLN) has the most impressive capital appreciation gains. The taxable equivalent yield for the the 28% bracket here is a little lower at 6.6%.

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.

Comments

[YoYoMama:]

There are also great muni CEFs with yields over 7%, and with management fees of less than 1.5%. These high yielders are also increasing their dividends over time: MAV, KTF, FMN, NMZ, APX & PMF. I own them, I love them.

Sep 11 09:34 AM

[GlobalTrekker:]

PVI's annual yield is wrong. That is the historic (and hysteric) yield annualized over the last year. It owes nearly all to a one-time spike in short-term tax-free interest rates. Its yield now is about 1.25% and falling. Still not terrible for its safety.

Sep 11 04:57 PM

[GlobalTrekker:]

YoYoMama, you have done spectacularly with your six holdings, but each one but KTF is trading at huge premiums. You are setting yourself up for a huge fall. Sell them and buy their equivalents trading at discounts. With the exception of KTF, I would short everyone of those funds if I could borrow the shares. Look at PMO, NPM, NPF, MQT, NUW, OIC, MHI, PMM, MUI, and MZF. They're what I am buying now.

Sep 11 05:03 PM

[YoYoMama:]

You are assuming I bought all my holdings at premium except KTF I did not. I only buy CEFs when discounted. All my holdings are in the green.

Since for this particular brokerage account I am following a dividend strategy, and not a capital appreciation strategy, I am putting in funds every couple of months. If a CEF in my portfolio is at premium, I do not put any more funds into the account. I check the charts, and if nothing is investable, I look for a different CEF to invest in.

Which means, last month, I bought KTF, and put nothing in the others.

Sorry, I am not selling any of my holdings. Because I am investing for dividends, and not capital appreciation, I care not if the value depreciates. My time horizon is long - 20 years - and I view depreciation as an opportunity to reinvest, not sell.

As for your other picks, some are reducing dividends, so they are not appropriate for my strategy.

As they say, some say POT-A-TO, others say Po - TAH - to. You follow your strategy. I'm quite happy with mine.


On Sep 11 05:03 PM GlobalTrekker wrote:

> YoYoMama, you have done spectacularly with your six holdings, but
> each one but KTF is trading at huge premiums. You are setting yourself
> up for a huge fall. Sell them and buy their equivalents trading
> at discounts. With the exception of KTF, I would short everyone
> of those funds if I could borrow the shares. Look at PMO, NPM, NPF,
> MQT, NUW, OIC, MHI, PMM, MUI, and MZF. They're what I am buying
> now.

Sep 14 11:09 AM