Municipal Bond ETFs

Municipal Bond ETFsOne unusual side effect of the U.S. credit crisis has tax-free municipal bonds paying yields higher than comparable Treasury securities which are not tax free at the Federal level. Normally, muni bonds pay a lower yield than Treasurys due to the different tax treatments.

For example, at the end of today’s trading, the average yield for a 2-year, AAA-rated, tax free Muni Bond was 2.57%. That compares to the taxable yield of 1.50% on a 2-year Treasury. See the Bonds Center at Yahoo finance for more comparisons.

Smart money has taken notice. According to a March 6 WSJ article, Wilbur Ross said that on Friday (Februay 29, 2008), his firm had purchased $1 billion of municipal bonds. Bill Gross, the money manager at the top of Warren Buffet‘s most admired list, bought $1.5 billion of municipal bonds on the same day.

Investors have several Muni ETFs to choose from to invest alongside the likes of Ross and Gross. The newest is Van Eck Global’s Short Term Municipal Bond ETF (Amex: SMB).

Launched on February 26, the new ETF is designed to offer investors exposure to investment-grade municipal bonds with a nominal maturity of 1 – 6 years. The ETF tracks the Lehman Brothers AMT-Free Short Continuous Municipal Index and carries a net expense ratio of 0.16%. See Van Eck’s website for more information.

As always, consult professional advice for best results.

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