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Taxing the Wealthy and the Selling of Muni Bond ETFs

NEW YORK (ETF Expert) -- So you thought that the biggest fallout over higher taxes for the wealthy might be the selling of stock assets. Indeed, investors sitting on monster capital gains in Apple (AAPL) have liquidated scores of shares in the culture-changer company.

Yet, a wide variety of riskier categories have held up nicely, including high-yield corporate bonds, preferred stock, dividend stocks, consumer defensive and consumer cyclical stocks. Any selling in these categories is more attributable to fiscal cliff uncertainty than an actual outcome with higher tax rates for $250,000+ families.

Perhaps ironically, a safer haven area on the risk spectrum has taken a bit of a recent nose-dive. Municipal bond ETFs are experiencing uncharacteristic declines on speculation that U.S. leaders will agree to reduce income tax breaks on muni debt. (Is this what Republicans mean by "closing loopholes?")

According to John D. McKinnon and Andrew Ackerman of the Wall Street Journal, both political parties consider it reasonable to tax higher-income households on a portion of municipal bond interest. Meredith Whitney's "default-gate" notwithstanding, all muni bond ETF investors are currently suffering the consequences of the proposed changes.

For instance, Market Vectors Intermediate Muni (ITM) is down 2.9%, Market Vectors High Yield Muni (HYD) is off 2.9% and PowerShares Insured National Muni (PZA) is 1.8% lower.

In addition, SPDR Barclays Muni Bond ETF (TFI) is down 1.5% and iShares S&P National Muni Bond (MUB) is off 1.4%. By comparison the iShares Total Bond Market (AGG) is down only 0.3%

Muni Bond ETFs might have continued notching high after 52-week high were it not for the recent news report. For instance, SPDR Nuveen S&P High Yield Muni (HYMB) had been up 8.3% over six months prior to last week and has since given up -2.3%.

Keep in mind, part of the muni bond attraction over the last six months can be traced to the expectation that tax rates on capital gains and dividends might rise for the wealthy next year. Some folks clearly shifted assets into tax-exempt municipal bonds. Now, that tax-exempt status is under fire.

Will curbing exemptions for muni bond interest on the "wealthy" reduce demand for muni bonds? Will it result in higher borrowing costs for states and municipalities that are already struggling? Quite possibly.

My clients still have an allocation to exchange-traded muni vehicles like PowerShares Insured National Muni and iShares S&P National Muni. Both remain above 200-day moving averages.

In essence, it is more sensible to let the market trends aid in decision making, rather than speculate on how a budget agreement may or may not affect muni bond ETFs over the longer term.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Stock quotes in this article: ITM, HYD, PZA, TFI, MUB, AGG, HYMB, AAPL 

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.

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