An example of a tax exempt ETF rated a "Buy," by TheStreet Ratings is the BlackRock Muni Holdings Fund (MHD), which is rated an A+ (Excellent), with a current yield of 5.65%, as of Friday's close. The fund uses significant leverage, and as of June 29, the average coupon, including zero coupon bonds, was 4.47%, according to BlackRock Investments. The fund "primarily in portfolios of long-term, investment-grade municipal obligations." As of June 29, 28.7% of the fund's managed assets were rated above the equivalent of BBB ratings form S&P, while 6.0% of the managed assets were rated the equivalent of BB or below, and 7.1% were unrated.
An example of a buy-rated open-ended municipal bond fund is the Dreyfus New York Tax Exempt Bond Fund (DRNYX), with a 30-day yield of 1.87%, as of Friday's close. This fund seeks to invest "substantially all of its assets in municipal bonds that provide income exempt from federal, New York state and New York city personal income taxes." Dreyfus also says that "the fund will invest at least 80% of its assets in investment grade municipal bonds (Baa/BBB or higher), or the unrated equivalent as determined by Dreyfus."
Losing Trust Preferreds
During the years before the bursting of the real estate bubble and the banking crisis in 2008, income-seeking investors faced with ever-declining municipal, corporate and Treasury bond yields, who were willing to take additional risk, moved into preferred stocks and trust preferred stocks. For many investors, these were favorable income plays, despite the lack of tax advantages.
Investors holding trust preferred shares in banks are going through a painful transition right now, because the Federal Reserve's proposed rules to implement Basel III capital requirements will exclude most trust preferred shares from regulatory Tier 1 capital. Since this change is considered a "capital treatment event," the banks are able to redeem the trust preferred shares, even before their call dates, often at face value, despite any premium the market previously placed on these high-yielding securities.Banks can still issue preferred equity and have it make up between 1% and 1.5% of their Tier 1 common equity ratios, provided that the new issues are perpetual noncumulative preferred shares, meaning that the issuer does not need to make up any missed dividend payments. JPMorgan Chase (JPM) on July 12 redeemed $9 billion in trust preferred shares, including nearly $4.2 billion with coupons higher than 6.5%. All the shares were redeemed for face value. Bank of America (BAC) on July 25 redeemed $3.9 billion in trust preferred shares, all of which had coupons of 6.00% or higher, with $2.3 billion paying over 7.50%. The company paid premium redemption prices for $1.8 billion of the redeemed trust preferred shares.
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