"Although equities tend to have attractive multi-year growth rates, there is always risk," caution Ron Rowland and Brandon Clay.
In their Invest with an Edge, they explain, "That's why investors have been taking a second look at bonds, specifically municipal bonds." Here's an ETF offering exposure to the muni bond sector.
"Affectionately called 'munis', municipal bonds have enjoyed a resurgence among retail investors, who are buying munis for three reasons:
1) Munis Have High Yield & No Taxes in Difficult Markets
"Municipal bonds are unique investment vehicles. They offer yields, but the interest is not taxed by the IRS. That way, the 'effective' yield for the muni is often higher than on taxable bonds. Moreover, as prices for munis have been falling, yields have been rising.
2) Munis Are Relatively Safe Investments
"When you're buying a muni bond, you're actually loaning to a state/local government or their agencies. Although cities can go bankrupt – thus preventing you from receiving back your initial investment – at least we can vote on governors and mayors.
"As a result, munis are a safer investment than many corporate bonds. Munis are one way for investors to find safety in this market.
3) Investors Want Something Cheap
"Even though cash has been a safe place this year, keeping cash is not always attractive. Psychologically, we know nothing happens when we leave cash in CDs or savings accounts.
"Interest hardly does anything for you, especially after taxes and inflation. That's why investors are still looking for places to park their investments. With municipal bonds yielding above treasuries, they seem to be one alternative to do-nothing cash.
"After surveying the market, we found a muni bond ETF to be a great candidate for investors. The SPDR Lehman S-T Municipal Bond ETF (ASE: SHM) is one of the best places to invest in munis today.
"One quick note about the name of this ETF: SHM is not a Lehman Brother's product; it simply tracks the benchmark established by Lehman.
"SPDR Lehman S-T bond has some of the benefits of holding bonds outright and some benefits of holding an ETF. For one, you collect the yield of the bonds. Right now, SHM is yielding +2.7%.
"Second, price swings on this ETF are not nearly as wild as equities. Although you can still gain or lose, SHM has been relatively stable.
"Finally, you can buy or sell this ETF at any time. You don't have to wait for any of the munis to reach maturity or get a penalty for selling early. For a stable investment, go with SHM."
Steven Halpern's TheStockAdvisors.com offers a daily look at the latest market commentary and favorite stock picks and investment ideas from the nation's leading financial newsletter advisors.
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Reader Comments (Page 1 of 1)
11-14-2008 @ 8:03AM
BHarrison said...
With the escalating problems of cities, counties, and states with their projected escalated budgetary problems . . . and the fraud and mismanagement of associated government projects, Ireally do not see where munis are going to be "such a bargain or profitable" in the long run.
Worsening economic conditions, foreclosures (property tax revenues), rising unemployment, etc. certainly do not project a rosy picture for municipal bonds.