What if the turn-up persists? Should bond holders run for the doors? No, writes Koesterich, not for those with one-plus year horizons anyway. After all, the iShares National AMT-Free Muni Bond ETF delivered a tax equivalent distribution yield for the year ending Jan. 28 of 4.05%.
And not so fast, James Colby, chief municipal strategist at Market Vectors ETFs, would say, since their Intermediate Muni ETF (ITM) has a three-year average return of 6.90%.
With the higher tax rates for incomes of $400,000 and up, those in a 35 percent to 39.6 percent tax bracket have even more to gain now from a tax-free coupon, says Colby. As for municipal credit-quality fears, Colby points out that defaults may affect a small number of investors, but not every issuer in the state, let alone the country. Choose your investment wisely he advises. “Our ETFs have no exposure greater than 4 percent or 5 percent to any one name.”