This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Why Muni Funds Beat Bonds, ETFs

Stocks in this article: MUB TFI VWITX FLTMX TSSAX

A storm swept through municipal markets in November. National municipal long-term funds lost 2.7% for the month, according to Morningstar. Panicked shareholders dumped funds, withdrawing $4.7 billion in the week of November 17 alone, according to the Investment Company Institute.

Is the worst over? Probably. Municipals fell when a flood of new bonds from California and elsewhere swamped demand. In recent days, the market has recovered as the level of new supplies slowed.

While the November downturn may have been a temporary blip, the turmoil is worth considering because it highlights the strengths of old-fashioned mutual funds.

At a time when changes are sweeping through tax-free markets, most investors who want to hold municipals should own them through mutual funds.

Should you buy a municipal mutual fund now? Yes. Top fund choices include Vanguard Intermediate-Term Tax-Exempt (VWITX) and Fidelity Intermediate Municipal Income (FLTMX). An intriguing new fund for today's difficult environment is the Thornburg Strategic Municipal Income (TSSAX), which has a yield of 4.1%.

Those who elect to hold individual bonds or municipal ETFs will face new hazards.

Shopping for individual bonds can be especially risky. In the past, selecting individual bonds was relatively simple, and markets were homogenous. Half of all bonds carried AAA ratings because they were insured. Default rates were negligible. If an insured bond did default, insurance companies nearly always made good on the loss. That simple world ended in 2008 when most bond insurers suffered big losses in mortgage markets. Some insurers left the business, and now only 7% of bonds are insured.

Regardless of whether a bond is insured, it has become more difficult to size up the outlook. In the past, most high-quality bonds traded in unison. If prices of Treasuries climbed, municipals also rose. But these days, markets can deliver surprises as investors worry about the difficult outlook for states and other municipal issuers. When a state like California faces a budget crisis, the bonds can soften -- even during periods when Treasury bonds are rising.

In this uncertain territory, municipal mutual funds offer some security. The funds are run by professional portfolio managers who can monitor the daily shifts in credit conditions and pick the safest bonds. Few individuals have the time or inclination to do complicated research and stay abreast of changing markets.

In addition, mutual funds offer some protection by staying broadly diversified. A typical fund owns hundreds of securities. If one or two default, then the portfolio will not suffer much. Also, because bonds cost $10,000 or more, most individuals cannot afford to build broadly diversified portfolios of individual securities.

1 of 2

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 18,053.71 +23.50 0.13%
S&P 500 2,088.77 +6.89 0.33%
NASDAQ 4,806.8590 +33.3870 0.70%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs