Income Investor Perspectives

Independent municipal bond market insights for advisors

Tag: ETFs

March 18, 2016

Muni Bond DIFM is Growing

Screen Shot 2016-03-17 at 2.26.54 PMMuni Bond DIFM Ownership is Growing

Rates are low and the Fed is on hold; municipal finances are stressed and bond market liquidity is down. While there would seem to be lots of reasons for investors to be avoiding municipal bonds, individual investors were actually net buyers of municipal bonds last year—but not through the traditional means of adding individual bonds to their portfolios.

Last year, according to data from the Federal Reserve, fewer individual investors were opting for the DIY (“Do It Yourself”) model of managing individual bonds on their own, and there was growth in the use of professionally managed (“Do It For Me,” or DIFM) mutual funds and ETFs.

Data from the Federal Reserve show that direct individual investor ownership of municipal bonds declined by over $25 billion last year, however, indirect ownership through muni bond mutual funds and ETFs grew significantly.

 

2014

 2015

Change

Total Outstanding

 $3,652.4B $3,714.8B +$62.4B +2%
Households (direct)

$1,540.4B

$1,514.8B

-$25.6B

-2%

Mutual Funds

$657.7B

$705.4B

+$47.7B

+7%

ETFs

 $14.6B

$18.5B

 +$3.9B

+27%

The positive flows into mutual funds and ETFs are continuing this year. Through March 9, muni bond mutual funds have attracted $10.7 billion in new assets (according to the Investment Company Institute) and muni ETFs have added almost $1.5 billion (according to FactSet data).

Part of what may be driving the shift away from DIY into DIFM…..

Click HERE to continue reading the complete article on ETF.com

This is not a recommendation to buy, sell or hold any of the securities or strategies mentioned. The author does not provide investment, tax, legal or accounting advice. Investors should consult with their own advisor and fully understand their own situation when considering changes to their strategy, tactics or individual investments. At the time the article was written, the author did not have any positions in the securities or strategies mentioned. The opinions expressed and the information contained herein is based on sources believed to be reliable, but its accuracy or appropriateness is not guaranteed. Past performance is interesting but is not a guarantee of future results. Investments in bonds, and fixed income funds or ETFs are subject to gains/losses based on the level of interest rates, market conditions and changes in credit quality of bond issuers. Additional information available upon request.
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March 6, 2016

Consider Swapping HY Bonds for HY Muni

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The investor’s shelf needs to include tools and techniques, as well as texts and journals. Tax-loss swaps are a tool frequently used by bond investors to turn lemons into lemonade by simultaneously harvesting losses and adjusting the positions in the portfolio. 

While many investors most often think of tax-loss swaps as a year-end strategy, now may be a good time to review your portfolio for opportunities to harvest tax losses.

This can be particularly timely for investors with allocations to high-yield corporate bonds who may be disappointed by recent negative returns and who were also surprised by the higher-than-expected correlations with their equity positions.

Of course, some investors without exposure to high-yield corporate bonds are currently thinking about getting in, suggesting that now could indeed be a good time to think about harvesting losses and establishing a new cost basis.

Investors who want to reduce the equity correlation of their fixed-income allocation and are comfortable maintaining their exposure to noninvestment-grade credit risk may want to consider swapping from high-yield corporate bonds into high-yield municipal bond ETFs.

While the credit risks in high-yield municipal bonds can be much different from traditional investment-grade public-purpose municipal financings, the recent performance of the high-yield muni sector has been much different from high-yield corporates… CLICK HERE to read my complete article on ETF.com

 

This is not a recommendation to buy, sell or hold any of the securities mentioned. The author does not provide investment, tax, legal or accounting advice. Investors should consult with their own advisor and fully understand their own situation when considering changes to their strategy, tactics or individual investments.

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February 22, 2016

Is Your Muni Bond ETF Too Safe?

Most investors know that they can take on too much risk, but very few probably realize that they can take on too much safety!

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Playing it too safe can hinder your chances for success.

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. 

Click here to read more from the author

The author does not provide investment, tax, legal or accounting advice. Investors should consult with their own advisor and fully understand their own situation when considering changes to their strategy, tactics or individual investments. Investments in bonds and fixed-income ETFs are subject to gains/losses based on the level of interest rates, market conditions and changes in credit quality of bond issuers. Additional information available upon request.
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December 18, 2014

The Benefits of Professional Management

  • When should an investor use a professional manager?
  • If an investor needs more performance (yield or return), should they use a professional manager?
  • Should a manager be selected based on performance?
  • If a manager’s performance is lagging, should they be fired (or sold) by the investor?
  • Will using a professional manager protect from market declines?

SUMMARY: Because so many investors seem to select managers by chasing recent performance, one might imagine that professional managers market themselves only by touting their performance. However, the fundamental reasons to use a professional investment manager are when the investor does not have the time or the necessary expertise to properly make those decisions themselves. Professional managers can be employed for all or a portion of a portfolio and should be selected first based on how well the manager’s strategy fits in with the investor’s goals. Neither performance nor fees should be the primary criteria for manager selection—downplaying the importance of how the strategy fits into the long-term goals could easily lead to improperly balanced risk exposure. While performance is very important, investors should favor those managers who emphasize their process, and be wary of those touting only their recent performance. 

This article discusses the benefits of using a professional manager to manage some or even all of the investment decisions—for example by using mutual funds or a separately managed account (SMA). Beyond the scope of this article is a discussion of using a professional wealth manager—such as a registered investment advisor—to conduct financial planning and to make all of the allocation and investment decisions.

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December 8, 2014

What’s the best way to time interest rates?

“Shouldn’t I just wait for rates to go higher?”

“When are yields going to be more attractive?”

“What will be the signal that rates are going to start moving?”

“What’s the best way to time interest rates?”

If these comments strike you as familiar, it is because these are some of the same questions that income-hungry investors have been asking for years—and now, with the Fed seemingly closer to finally raising the fed funds target rate, the thirst for higher more attractive yields has intensified.

Answering these questions in context, however, also requires addressing several key investing ideas, including:

  • Portfolio diversification and how much to allocate to bonds (and, therefore, also to cash and equities)
  • How much income you want or need is a function of your lifestyle—not of the market: your goals should be mapped out and described in your investment plan or policy
  • Understanding what influences interest rates and how to invest through the economic/interest rate cycles

The way that an investor deals with the first two points will be helped or hindered depending on how they deal with the third point. This article will discuss how to time interest rates, and we will discuss the other issues in future articles.

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