(For a video version of this example, click: Get More Income With Tax Free Municipal Bonds.)
If BBB Rated Munis Are So Safe, Why Don't We Hear More About Them?
1. Lack of supply.
2. Lack of knowledge by brokers who don't specialize in bonds.
Few bond investors are aware that BBB rated municipal bonds have a superior success record to AAA rated corporate bonds when you compare the default rates of each asset class over the last 15 years, according to a recent Standard & Poor's study:
BBB Municipals: 99.63% success record
AAA Corporates: 99.35% success record
There is a big misconception about risk in the muni bond market. While many investors are unaware of this misconception, discerning investors take advantage of it and generate significantly more income, while maintaining a high quality bond portfolio.
How much more income do BBB investment grade municipals offer vs. AAA rated municipals?
That can vary, but anywhere from 15%-50% more income. On a $1 million dollar portfolio, that can equate to as much as an extra $20,000/year tax-free. Over 10 years with compounded interest, that can mean close to a $250,000 difference.
So again, here's two main reasons in greater depth:
1) Lack of supply...
Many of the well known, large firms, or "wire houses," have thousands of brokers across the country. It makes sense that if they are going to promote an investment product, they would only do so if there is a large amount of it available.
As far as muni bonds go, around 80% of all new municipal bond issues historically have been A rated or higher. BBB rated munis represent a very small amount of new issues -- often under 10% -- depending on the sector.
So just based on the limited supply of BBB munis, it becomes clear why the big firms have promoted A, AA and AAA rated bonds all these years.
2) Lack of knowledge by brokers who don't specialize in bonds…
Many of the big firms focus on collecting assets and sell investments across a broad range of classes including stocks, mutual finds, bonds, insurance, etc.
Consequently, brokers at these big firms oftentimes have broad, generalized knowledge on a variety of investment classes. Many of these brokers lack a depth of knowledge and available resources specifically in the muni market, as it is not necessary for them.
Due to this lack of knowledge of the muni market by the vast majority of brokers, many clients of the larger firms have often been left with the incorrect impression that BBB rated munis are not safe -- thus creating the misconception of risk.
This lack of knowledge and misconception of risk in the muni market represents a significant opportunity for investors in the know.
Some bond buyers are making significantly higher yield and income -- up to 50% more income -- because they have the right information and guidance.
Working with a municipal bond specialist, with depth of knowledge and resources in this specific investment class offers great value to muni bond buyers.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Disclaimer: Investing in municipal bonds involves risk, including market fluctuations and potential loss of principal. This has been produced solely for informational purposes and is not to be construed as a recommendation of any particular investment or investment strategy. It is also not a solicitation or an offer to buy or sell any securities or related financial instruments. You should consider consulting a broker or investment professional before investing or implementing any investment strategy. The preceding presentation is based on information obtained from sources believed to be reliable but no independent verification has been made, nor is its accuracy or completeness guaranteed.
(For a video version of this demonstration, click: Truth Revealed About BBB Rated Tax Free Municipal Bonds)