Municipal Bond ETFs Turn In Solid Year

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 |  Includes: MUB, SUB, TFI
by: Tom Lydon

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Municipal bonds were one of the best-performing categories in fixed-income exchange traded funds in 2011 despite talk of widespread defaults earlier in the year. One of the largest muni bond ETFs is up about 12% year to date.

“Muni performance in 2011 was primarily the function of lower [Treasury Bond] rates,” Priscilla Hancock, municipal strategist at JPMorgan Asset Management, said on Financial Times. “What has helped [ the municipal bond market] outperform so many other markets is that we came from a cheap level. There was more room to run.”

In late 2010, investors were warned that there was eminent risk for municipal bonds as defaults from state and local governments were expected. Muni bonds did lose about 4.2% during the fourth quarter of 2010.

Almost exactly a year ago, noted analyst Meredith Whitney told “60 Minutes” she expected a huge run of municipal defaults, WSJ’s MarketBeat reports.

Despite the news, and circumstances, the iShares S&P National AMT-Free Municipal Bond Fund (NYSEArca: MUB) has gained over 10%.

Nicole Bullock for the Financial Times reports that U.S. municipal bonds have returned about 10.10% year-to-date, slightly higher than the broad U.S. Treasuries Index which gained 9.95%, according to Barclays Capital Index.

Still, state and local governments remain under pressure due to lingering deficits. Tax revenue has not been enough to offset the long term threat that has hurt budgets. Overall, however, the fears of major defaults across the country have subsided.

Looking ahead, if the U.S. economy fell into another recession, state and local governments would face further budget crisis. As lawmakers in Washington hash out tax cuts and reform, the breaks that investors gain from investment in muni-bonds could be at risk.

Other muni-bond ETFs include:

  • iShares S&P Short Term National AMT-Free Municipal Bond ETF (NYSEArca: SUB)
  • SPDR Barclays Capital Municipal BondETF (NYSEArca: TFI)

iShares S&P National AMT-Free Municipal Bond Fund

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Tisha Guerrero contributed to this article.

Disclosure: None