Financial Samurai - Forums

General Investing => Fixed Income Focused => Topic started by: Tedo on September 16, 2018, 09:56:53 AM

Title: Muni Bond ETFs
Post by: Tedo on September 16, 2018, 09:56:53 AM
What are the best Muni Bond ETFs? Any opinions?
Title: Re: Muni Bond ETFs
Post by: Sam on September 16, 2018, 09:58:51 AM
MUB is one of the largest national muni bond funds. CMF is one pertinent to California to save on state taxes as well as federal.

There are a whole bunch, state specific as well.
Title: Re: Muni Bond ETFs
Post by: Tedo on September 16, 2018, 10:03:24 AM
Sam,

Thanks for the response, I have looked at MUB, I'm also looking at PML: Pimco Municipal Income CEF for higher yield.
Title: Re: Muni Bond ETFs
Post by: Triple - Nickels on September 18, 2018, 02:40:49 PM
Sam,

You're have a big stash of CMF in your portfolio, what's your take on why CMF has declined 1% in the past week?

Thanks,
Triple-Nickels
Title: Re: Muni Bond ETFs
Post by: Sam on September 18, 2018, 11:55:11 PM
Quote from: Triple - Nickels on September 18, 2018, 02:40:49 PM
Sam,

You're have a big stash of CMF in your portfolio, what's your take on why CMF has declined 1% in the past week?

Thanks,
Triple-Nickels

No take. Sub 10% moves don't hit my radar. Does a 1% bother you?

Overall, this has been a good year with my overall public equity portfolio up about 9%.
Title: Re: Muni Bond ETFs
Post by: ptkelly on September 25, 2018, 05:26:42 AM
Pay attention to the price discount to NAV on closed end funds.  Sites such at CEFconnect.com will show you the historical trends and averages.  Best to wait to buy a CEF when the discount is below a relevant historical average.

A lot of CEFs employ leverage which magnifies their move versus a comparable unleveraged ETF such as the muni ETF MUB.  Not sure what PIMCO's leverage ratio is but Nuveen's comparable muni CEF NEA employs about 30% leverage.

So not only will this magnify the moves in NAV and therefor the correlated price move, but the market may more aggressively sell/buy the CEF in response to those changes thus impacting the market price discount to NAV.

A good example is the preferred ETF PFF versus the Nuveen preferred closed-end fund JPC.  JPC has suffered pretty greatly from a modest 5% decline in "underlying" PFF ETF compounded by a widening of its discount to NAV to 11%+ for a total ~12% price decline.  PFF is yielding about 5% whereas JPC is yielding ~7% due to leverage but that yield advantage has been more than wiped out to market price action.
Title: Re: Muni Bond ETFs
Post by: Sam on September 25, 2018, 06:47:08 AM
Quote from: ptkelly on September 25, 2018, 05:26:42 AM
Pay attention to the price discount to NAV on closed end funds.  Sites such at CEFconnect.com will show you the historical trends and averages.  Best to wait to buy a CEF when the discount is below a relevant historical average.

A lot of CEFs employ leverage which magnifies their move versus a comparable unleveraged ETF such as the muni ETF MUB.  Not sure what PIMCO's leverage ratio is but Nuveen's comparable muni CEF NEA employs about 30% leverage.

So not only will this magnify the moves in NAV and therefor the correlated price move, but the market may more aggressively sell/buy the CEF in response to those changes thus impacting the market price discount to NAV.

A good example is the preferred ETF PFF versus the Nuveen preferred closed-end fund JPC.  JPC has suffered pretty greatly from a modest 5% decline in "underlying" PFF ETF compounded by a widening of its discount to NAV to 11%+ for a total ~12% price decline.  PFF is yielding about 5% whereas JPC is yielding ~7% due to leverage but that yield advantage has been more than wiped out to market price action.

Great point about observing the discount to NAV. When buying a closed end fund, not only do you have to invest based on the assets it owns, but make a call on whether the discount to NAV will narrow or widen over time. In other words, you have to get TWO calls right.

It's like buying international equities. Got to get the company call right AND the currency right. You can buy a foreign co that goes up 20%, but if their currency depreciates by 20% you are treading water.
Title: Re: Muni Bond ETFs
Post by: NYFamilyof4 on October 08, 2018, 06:24:02 AM
Should we stay away from muni bond ETFs in the short term given the expected continued rising of interest rates over the next year?
Title: Re: Muni Bond ETFs
Post by: Fat Tony on December 29, 2018, 06:19:01 PM
Quote from: Sam on September 16, 2018, 09:58:51 AM
MUB is one of the largest national muni bond funds. CMF is one pertinent to California to save on state taxes as well as federal.

Sam, by my math it looks MUB is actually a better deal than CMF for Californians right now, even in the 13.3% bracket (!). The pos-tax, post-expense yield of CMF is 2.01% vs. MUB's 2.25%. It seems that there is no real reason to invest in CMF at the current prices, given that you get a better effective yield and more diversification in the whole nation. Is this just a temporary market inefficiency, or are there people in special tax situations where the CMF fund makes sense, or am I missing something big-time in the math? As long as there is larger than an 11% yield premium for MUB over CMF, then CMF isn't worth it. The top California corporate tax bracket is even lower than the individual one as well, and given the federal tax reform, I'd expect slightly fewer corporations to be holding munis due to the lessened tax premium. I'm not sure how much those effects have propagated out to the market.

CMF: 2.26% yield, 0.25% expense ratio. https://www.ishares.com/us/products/239731/ishares-california-amtfree-muni-bond-etf. Tax rate: 0%.

Effective yield 2.26-0.25-0.0=2.01%

MUB: 2.60% yield, 0.07% expense ratio. https://www.ishares.com/us/products/239766/ishares-national-amtfree-muni-bond-etf. Looking at their tax-exempt interest dividends by state 2017, 18.91% of the dividends are from CA, and the other 81.09% are from outside. https://www.ishares.com/us/literature/tax-information/2017-ishares-tax-exempt-interest-by-state-final-364639.pdf. This means that the tax rate is 13.3% * 81.09% * 2.60% = 0.28%.

Effective yield 2.60-0.07-0.28=2.25%
Title: Re: Muni Bond ETFs
Post by: Fat Tony on February 19, 2019, 11:29:42 PM
I goofed here, I realized while doing taxes that California doesn't let you exempt interest from a mutual fund unless at least 50% of it can be exempted. So MUB would not get ANY California exemption, while CMF gets the full exemption. However even then with the numbers from 12/29/2018, MUB is tied to within 0.01% of CMF's yield using the TOP California bracket, and MUB still wins when you include expense ratios.