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California Municipal Bond ETFs Not Worth Risk

Stocks in this article: CXAPWZCMFPZA

SPDR Barclays Capital CA Muni Bond (CXA), up 18.0%

PowerShares Insured California Muni Bond (PWZ), up 17.2%

iShares S&P CA AMT-Free Muni Bond (CMF), up 15.0%

By comparison, the S&P 500 SPDR Trust (SPY) is up 7.5%

Despite those strong returns, I believe it is more sensible for high-net-worth investors to diversify nationally for muni bond exposure. Banking on the general obligation debt of the lowest-rated state in the union alone isn't worthy of the additional tax-free yield.

For instance, an investor in the top federal bracket of 35% can garner an approximate tax-free equivalent yield of 6.8% in PowerShares Insured National Muni (PZA). He or she might be able to obtain 7.7% in approximate tax-free equivalent yield in PowerShares Insured California Muni. Stretching for the additional yield, however, invites greater price volatility.

What's more, as recently as two years ago, a leading credit-default-swap service ranked California as the 10th most likely government to default, with a 25% probability. Have things in California improved so much over the past two years that the state no longer faces the threat of defaulting on its obligations? Is a U.S. government bailout so entirely certain that one should stretch for the extra percentage point?

My advice? Stick with national muni ETFs such as PZA or iShares S&P National AMT-Free Muni (MUB).

You can listen to the ETF Expert Radio Show "LIVE", via podcast or on your iPod. You can follow me on Twitter @ETFexpert.

Disclosure Statement: ETF Expert is a website that makes the world of ETFs easier to understand. Gary Gordon, Pacific Park Financial and/or its clients may hold positions in ETFs, mutual funds and investment assets mentioned. The commentary does not constitute individualized investment advice. The opinions offered are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert at the site.

Gary Gordon reads:

Real Clear Markets
Jeff Miller
indexuniverse
Charles Kirk
On Twitter, Gary Gordon follows:

Jonathan Hoenig
Doug Kass
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