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As more states and localities seek income, municipal bond exchange traded funds have becoming increasingly popular. Recent information, however, underscores the need for more due diligence when it comes to investing in the bonds.

Disclosure is often substandard and information isn’t vetted as intensively as in stock markets, say David Reilly and Liam Denning for The Wall Street Journal. For example, financial statements in munis aren’t reviewed by the Securities and Exchange Commission (SEC).

One way to cope with scant information is by using muni bond ETFs instead of individual issues. A basket of such bonds has been vetted by the issuer, and with dozens or hundreds of holdings, your risk is diversified.

Yali N’Diaye for iMarketNews reports that according to Moody’s, municipalities face a strong need to renew bank liquidity facilities through 2011 because of their outstanding variable rate demand for bonds and commercial paper. Moody’s did say that this has been factored in and shouldn’t result in downgrades.

  • Market Vectors High Yield Municipal Index (NYSEARCA:HYD): Yields 5.7%
  • SPDR Barclays Capital Municipal Bond (NYSEARCA:TFI): Yields 3.6%
  • Market Vectors Lehman Brothers AMT-Free Long Municipal (NYSEARCA:MLN): Yields 4%

Tisha Guerrero contributed to this article.

Disclosure: None

Source: Muni Bond ETFs: The Diversified Option