Muni Catchup 8/4
by PL
My latest article on muni ETFs was published today on ETF.com.
Municipal bond yields may be low, but the total returns for most municipal bond ETFs have been very strong—higher than some equity returns. In addition, over the last six months, almost all muni ETFs have been negatively correlated to SPY; yet some muni ETFs have been better diversifiers than others.
Read the article for details. You can also visit my author page while you’re there if you want to read my earlier articles on muni ETFs.
Income Investor Perspectives 
Pat. my concern with muni ETFs is the average prices per bond are relatively high in our analysis–which have embedded losses as the issues come due–Is this a concern to you? How do you compare YTM on ETFs?
LikeLike
The premium prices for the bonds in the portfolios are the same prices that open-end funds are paying, but the ETF holdings are more transparent so the question may be easier to ask about ETFs.
The decline in the premium is not necessarily a loss in principal because the above-market rate of cash flow is a return of principal, which can then be reinvested earlier than maturity, potentially boosting total return. All other factors being equal, premium bonds are less susceptible to price eroision if rates move higher, so managers (and many investors) prefer premium bonds. Also, bond funds and ETFs are managed to track a benchmark, so holdings are typically sold well before the maturity dates. There is an incentive (and a fiduciary obligation) for the portfolio managers to seek to preserve the principal invested under their care.
Finally, regarding YTM, the calculation assumes holding to maturity with reinvestment of the cash flows–that is a lot to assume for an ETF. So the YTM for an ETF is an important and relevant data point, but should also be considered along with dividend yield (or SEC yield) and duration.
LikeLike