Municipal bond exchange traded funds have become a go-to investment for their decent yields when the tax break is factored in. They offer liquidity, diversification and an income stream for investors.
A quick primer: Muni bonds come in two flavors -- revenue bonds and general obligation bonds. Revenue bonds fund improvements in projects like airports or power plants that generate income. These bonds can repay investors only from that income. In a GO bond, municipalities can raise taxes to repay bondholders, Susan J. Aloise wrote for InvestorPlace.
According to Thompson Reuters data, muni-bond ETFs touted $1.1 billion in inflows for the week ended August 8, marking the highest level in five months.
The latest concern regarding the muni-bond market concerns the recent bankruptcy filings of three California municipalities -- San Bernadino, Stockton and Mammoth Lakes. SEC Chairman Mary Schapiro told Congress last month that the nearly $4 trillion market needs mandatory disclosure rules and uniform accounting standards to better protect investors. The better transparency will help investors understand the muni-market and the risks involved.
For those investors who want exposure to this corner of the market, with the ease of one-shot diversification and better liquidity, ETFs may be the answer. Here are a few to consider:
- Market Vectors High Yield Municipal Index (NYSEARCA:HYD) This ETF has $781 million in assets, and focuses on lower credit quality, higher-yielding bonds. The fund boasts a current dividend yield of 5.1%. HYD's year-to-date return is nearly 12%, and it has an expense ratio of 0.35%.
- iShares S&P AMT Free Municipal Bond Fund (MUB) Top holdings include bonds from California, Illinois, South Carolina and Texas. With more than $3 billion in assets, MUB has a current dividend yield of 3%. Its year-to-date return is nearly 5%, and it has a tiny expense ratio of 0.25%.
- PowerShares Insured National Municipal Bond Portfolio (NYSEARCA:PZA) Top holdings include revenue bonds for Puerto Rico, Florida, Texas and New Jersey. With nearly $815 million in assets, PZA has a current dividend yield of 4.2%. Its year-to-date return is 7.5%, and it has an expense ratio of 0.28%.
- Market Vectors Long Municipal Index (NYSEARCA:MLN) MLN is the smallest ETF in this group with assets of $102 million. It has a current dividend yield of 4%. Its year-to-date return is 7.9%, and it has an expense ratio of 0.24%.
Tisha Guerrero contributed to this article.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.