Municipal bond exchange traded fund investors could be impacted by the outcome of the presidential election, so they are watching for any potential changes to the federal income-tax exemption status on munis as the government tries to tackle the growing deficit problem.
In outlining their goals to control the country's heavy deficit, both President Barack Obama and Mitt Romney have proposed eliminating the federal income tax exemption on muni bond interest or limiting it to fewer investors, reports Deborah Levine for MarketWatch. According to LPL Financial, the exclusion on interest costs the government about $49 billion in fiscal 2013.
While the idea has cropped up over the years, the proposal has usually been forgotten as many expected a removal of the tax-exempt status would do more harm than good.
"If you take away that subsidy, state and local governments will see an increase in their cost to do things, shifting the burden to other taxpayers," Richard Ciccarone, chief research officer at McDonnell Investment Management, said in the article.
Additionally, the tax exempt status benefits a range of investors. According to the Internal Revenue Service, about 51% of all muni-bond-interest income was claimed by investors with less than $200,000 in earnings.
Municipal bonds went out of favor in late 2010 when financial analyst Meredith Whitney predicted massive defaults in the muni bonds market. However, muni bond funds have attracted $50 billion in assets over the last 14 months as investors looked for additional sources of yields with comparatively strong credits.
"The fallout from Whitney's comments was substantial," Jim Colby, a senior strategist at Market Vectors, said in the article.
Some muni bond ETFs include:
- iShares S&P National Municipal Bond Fund (NYSEARCA:MUB): 1.64% 30-day SEC yield
- SPDR Nuveen Barclays Capital Short Term Municipal Bond ETF (NYSEARCA:SHM): 0.40% 30-day SEC yield
- SPDR Nuveen Barclays Capital Municipal Bond ETF (NYSEARCA:TFI): 1.65% 30-day SEC yield
- PowerShares Insured National Municipal Bond Portfolio (NYSEARCA:PZA): 2.97% 30-day SEC yield
- Market Vectors Intermediate Municipal Index ETF (NYSEARCA:ITM): 1.86% 30-day SEC yield
Max Chen 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. 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.