Garrett Beauvais'  Instablog

I frequently get asked by individual investors how they can earn more money on their cash.  With interest rates of traditional savings vehicles such as money market accounts, money market mutual funds, and CDs all paying from 0.5% to 2% annually where should an investor look?  My answer inevitably is that to earn significantly higher yields one needs to look beyond government insured deposit accounts and similar vehicles and consider corporate debt, foreign government debt, and municipal debt.  While we hold LQD (investment grade corporate bond ETF), and HYG & JNK (high yield corporate bond ETFs) in many client accounts, I often buy municipal bond funds as a way to put uninvested cash to work.

The iShares National Municipal Bond ETF (MUB) is currently yielding 5.60% on a taxable equivalent basis (35% marginal tax rate – non-taxable yield is 3.64%) over three times the 1.71% average yield on 1 year CDs!  If you are willing to endure even more risk, higher yields are available through leveraged closed-end muni bond funds.  In the table below are 28 leveraged closed-end muni bond funds (1) with assets over $100M (2) that are all delivering taxable equivalent yields over 9% and (3) pay monthly dividends that (4) have been stable or increasing over the last 12 months and (5) trade at a discount to their net asset values (all data from www.cefconnect.com as of 10/8/09).

It’s been a rough ride for investors in solar stocks but now may be the time to get back in and the Claymore/MAC Global Solar Energy Index ETF (TAN) looks like a great way to go.
 

From its high of over $30 in May 2008, TAN plunged to less than $5 in March of this year.  Excess capacity and oversupply in the solar panel business was compounded by the global financial crisis leaving solar companies feeling the pinch of negative leverage.  Add to that (1) a dramatic drop in energy prices, (2) reduced subsidies for new solar installations in Spain and Germany, and (3) a failure of the U.S. government to develop an energy policy in 2008 and there was a total meltdown in solar stocks with many falling by as much as 90% from their peaks.

Now many of these conditions have seen dramatic improvement.  Solar panel manufacturers have written down and worked off much of their excess inventories, liquidity has returned to capital markets, and energy prices have found some stability.  More recently, China announced plans to build the world’s largest solar farm with First Solar (FSLR) and natural gas futures finally look as if they have turned up.
 

Green energy solutions, and solar in particular, will be natural beneficiaries as the world’s economies return to growth from the recent recessionary period and combined with increasing pressure to restrict greenhouse gases growth in green energy solutions is simply inevitable and to increase equity exposure here is a no-brainer. 
 

The photovoltaic space is crowded and with so many players and competing technologies picking winners will not be easy. TAN shares provide a nice basket of broad solar exposure to several of the leaders and help shelter investors from some of the extreme volatility common to solar stocks.  FSLR is the largest holding at nearly 11%.  FSLR is the low cost leader and earlier this year became the first volume producer under $1/watt reaching $0.87/watt in the second quarter.  With the announcement of the Chinese plan to build the world’s largest solar farm and First Solar’s cost advantage they are clearly in the catbird’s seat.  I should note here that FSLR is a recommended stock holding in The Green Investor newsletter where I am a contributing editor.
 

The other attractive aspect of TAN shares are the geographic coverage they provide:  the holdings are roughly evenly divided between companies in the U.S., in Asia, and in Europe providing both geographic diversification and an inherent currency hedge.
 

Looking at the price history for TAN since inception you can see that for most of mid-November 2008 through mid-March 2009 TAN shares were trading below the $8 range and subsequently that price now appears to formed a reasonable support level with TAN shares bouncing off that support on significantly higher volume last week.
 

While current stock market rally may be getting long in the tooth and I would expect TAN shares to pull back along with any broader market weakness, I clearly would see a pullback as an opportunity to increase my TAN exposure.
 

Disclosure:  Long TAN

With paltry yields on savings accounts, money markets, CDs, and U.S. government debt investors have flocked to corporate and municipal debt en mass this year in search of higher yields and closed-end municipal bond funds have been no exception.  Now however a lot of the bargains are gone and in our MuniFundInvestor.com newsletter the number of recommended funds with a buy signal has dropped dramatically.  What follows is a current snapshot of the closed-end municipal bond fund landscape.

Currently, closed-end national municipal bond funds are delivering yields ranging from 3.5% up to 9.1% depending on the quality of their holdings and the amount of leverage they employ.  More than three quarters of all the closed-end national municipal bond funds employ leverage and the amount of leverage ranges from 25%-50% depending on the fund.  Leverage (and the higher yield it delivers) is one of the key reasons for investors to choose a closed-end fund over the iShares S&P National Municipal Bond ETF (MUB), mutual funds, or holding individual bonds.  With MUB currently yielding 3.69%, it yields less than all but one of its closed-end cousins.  The average yield of the 25 unleveraged closed-end national municipal bond funds is 5.78% and the average for the leveraged ones is over a full percentage point higher at 6.86%.

There over 107 closed-end national municipal bond funds to choose from and back in November-December of last year, most traded at discounts to net asset value in excess of 10%.  Granted discounts in that time frame were unusually high, but they have shrunk dramatically as investors have scoured the landscape for yield.  As of 8/19/09, only 70 of these funds traded at a discount to net asset value and the average discount is now just -1%, which is unusually small, meaning that, at least compared to their long-term history, these funds are now expensive (find the discounts to NAV at etfconnect.com).  Still, with government debt yields so low, it would not be surprising to see this situation continue until even more of these funds trade at par.