This Day On The Street
Continue to site
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

Why Muni Funds Beat Bonds, ETFs

ETFs also provide diversification, but they present risks that were highlighted in the November downturn. The ETFs own baskets of securities and trade constantly on stock exchanges. Most often, the share prices trade for the value of the assets in the portfolios. But in uncertain times, the shares can dip and sell for a discount to the value of assets.

During the week of November 15, discounts reached 2% for ETFs such as iShares S&P National AMT-Free Muni Bond (MUB) and SPDR Nuveen Barclays Capital Municipal Bond (TFI). Investors who sought to sell would have only received 98 cents for every dollar of assets in the portfolio. In contrast, mutual funds always trade for 100 cents on the dollar.

To further the case for buying a municipal mutual fund, municipals represent some of the most attractive fixed-income values, with 10-year tax-free issues yielding 3.10%. That is the equivalent of taxable bonds with yields of 4.3% for investors in the 28% bracket. In contrast, 10-year Treasuries yield only 2.8%.

The Thornburg Strategic Municipal Income fund has the flexibility to roam throughout the bond universe, buying issues of different maturities and credit qualities. This is very different than typical funds, which focus on a single segment, such as long-term high-quality bonds. "We wanted to offer a fund that can take advantage of the changes in municipal markets," says portfolio manager Christopher Ryon.

A year ago, the Thornburg fund began emphasizing bonds rated BBB, the lowest category in the investment-grade universe. The managers figured that the bonds had become undervalued as investors worried about defaults. Thornburg also emphasized longer bonds; they thrive when interest rates fall. The strategy proved on target. During the past year, the fund returned 6.5%, outdoing 98% of its peers.

The greatest long-term danger faced by municipal investors now could be a rise in interest rates. If that happens, bond prices will fall. But Thornburg has the ability to limit interest-rate risk by focusing on short-term bonds. Such bonds can prove relatively resilient in periods of rising rates. By exploiting its flexible mandate, the Thornburg fund may be able to protect shareholders against the hazards of volatile municipal markets.

Municipal funds for difficult markets

-- Written by Stan Luxenberg


Become a fan of TheStreet on Facebook.

Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.
2 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

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
Stocks Under $10

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

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

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
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
TFI $49.75 0.00%
MUB $112.21 0.00%
AAPL $93.74 0.00%
FB $117.58 0.00%
GOOG $693.01 0.00%


Chart of I:DJI
DOW 17,773.64 -57.12 -0.32%
S&P 500 2,065.30 -10.51 -0.51%
NASDAQ 4,775.3580 -29.9330 -0.62%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs