interested in some diversification into tax free Munis…anyone have any insight?
are ETFs better than just buying the bonds?
any hidden tax charges?
anything else i need to know?
I have a small allocation in a few Vanguard muni funds. Yield is around 3-4% (higher than cash) and tax free. Some price fluctuation, but not much and seems to be inversely correlated to the major stock indicies (when my equities are down, these funds tend to be up slightly). I also reinvest all dividends (monthly).
Just told my dad to allocate a decent portion to his state tax free vanguard muni. Yield is solid and dividend reinvestment is the way to go. He hasnt had any complaints.
VWITX is a very decent muni bond fund. Looking at the returns alone, it’s hard to bet against. But, check out the tracking error. It hasn’t performed inline with the muni index it tracks, ever. Not even close. Granted, it’s performed better, but that’s still a big red flag when you’re going passive. It should materially perform better or worse than its index.
Things you want to know: Is it AMT free? Is passive really the way I want to go?
Obviously 95% here are religiously passive (which is ironic), but think about the muni space and ask yourself if you want to blindly follow the index. You’ll own a small portion of every default you read about, you would have held a large amount (about 4-5% of Puerto Rico munis) this time last year, and there’s no one doing any credit research in a market that can really benefit from it.
There are dozens of actively managed muni funds that have consistently outperformed Vanguard. Do a little more homework and invest in one of those. Fixed income is not where you want to go passive.
^what fees are they charging?
also has anyone here actually purchases a muni bond for their portfolio. if so, how much were the commissions?
I’m not a fan of the funds/ ETF’s. They usually try to maintain some sort of duration i.e. short, intermediate,long. Obviously yield curve changes over time won’t let you capture gains associated with yield curve shifts if you’re invested in a fund with static duration. Because muni’s are often called prior to maturity, you can take the proceeds and re-invest into a part of the curve that looks attractive. Only downside to this obviously is that you need a lot of cash upfront to be purchasing actual blocks of muni’s.
Pretty low. Depends on the size of the fund generally. You can find good actively managed bond funds for 25-45 bps. No commissions.
^been looking around - usually fees are over 1%.
which ones do you like?
I also have a question about muni’s. Should I reinvest the full 7 figures of annual income into more muni’s, or is there a better place to park that money?
One caveat that I don’t think is mentioned is that you can actually lose money with muni ETFs. Sure, actual bonds’ prices do go down, but if you hold to maturity, you’ll have your money back. This is not the case with muni ETFs. Having said that, if you’re a retail investor with, say $200,000, then ETF is your only option.
OP, take a look at VWITX, which is mentioned above. Yield is after expense ratio is >1%.
https://personal.vanguard.com/us/funds/snapshot?FundId=0042&FundIntExt=INT
You must be looking at the wrong share class. Just a quick look at a few research lists and most intermediate muni funds are in the 25-65 bps range (slightly higher than what I guessed earlier). It may be that you’re looking at the initial minimum investment and don’t think you can buy the I Share, but most accounts at places like Schwab, Fido, Scottrade, etc. get around those minimums. You’ll have to pay a ticket charge, generally $25 or less, but it’s worth it if you’re holding on to it for a while.
Can’t really make any recommedations without knowing what you’re looking to get out of it. Total return vs income, duration, investment grade vs high-yield. And, honestly, the Vanguard fund has performed very well. Too well for my liking actually. It doesn’t track the index and that’s its stated objective, so I wouldn’t buy it for that reason alone. If that doesn’t bother you, it is the easiest choice.
Without knowing your situation, I’d go with something like Nuveen High Yield Muni (NHMRX). They’ve done a consistently good job in the HY Muni space, and unless you’re IHIHM with hundreds of thousands to invest in munis, the income from a regular muni fund isn’t going to get you that extra hotel room for your mother-in-law.
Why aren’t VWITX, VWLTX, VWATX, etc options for such an investor? Not ETFs…
You should check in with iheart. He’s an expert on this.
I can speak to the mutual fund side of things. If you buy an intermediate-term muni fund, say a duration of 7 years, and you hold it for 7 years, the chances of you being in the red are 0%. It has never happened. (Seriously, cherry pick the time frame and start in 2008-2013. You’ll still have made about 3% a year.) So, yes, while buying an individual muni bond is very simple to understand - collect the coupon and get your principle back in 7 years, muni funds don’t lose money over medium to long term time frames either. Plus, you get the added benefits of diversification just in case that single muni you bought was a Stockton, CA bond.
I have a white paper on the chances of losing money in bond funds (not just ours, but industry wide) over different time periods, but I obviously can’t share it. Can you lose money over 1-2 year? Yes, about 25% of the time. Over 3 years? Less than 10% of the time. Over four year? Less than 1% chance you’ll have lost money.
tl;dr - For any bond fund, if you hold it for as long as its stated duration, you’re not going to lose money. High-yield is the only exception and even then, it’s a small chance.