Most investors know that they can take on too much risk, but very few probably realize that they can take on too much safety!
With this year’s volatility in global markets, municipal bond ETFs appear to be benefiting from “flight to safety” flows, with assets under management up over 4% (through February 10).
Because municipal bonds are generally viewed as a so-called “safe” investment, it is not surprising that investors are shifting some of their assets into muni ETFs, with a significant percentage of that money going into the “safer” low duration muni ETFs
There are risks of using only low duration muni ETFs, however. In some cases, taking on less investment risk may mean reducing the ability to achieve an important future goal. In other words, some investments can be too safe.
Lower duration ETFs may “feel” safer, but are they?
For example, many investors have favored short duration ETFs in order to avoid taking on too much interest rate (or market) risk, perhaps not realizing they are increasing their reinvestment risk. Being able to make an informed judgment about how much reinvestment risk to take on requires an understanding of how much market risk you are taking on.
Depending on your goals, you may be able to take on minimal risk, or your circumstances may force you to take on more risk. Using Duration can you help be better informed about the risks you are taking when you make those decisions.
Click here to go to ETF.com to read about using Duration As a Guide With Muni ETFs.