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2. Invest in a closed-end bond fund.
3. Buy individual
Worried that the municipality and the insurer could both default? (Unlikely, but not impossible.) Then buy only tax-free bonds insured by Berkshire Hathaway Assurance Co., a subsidiary of Berkshire Hathaway ( BRK.A) with a stellar AAA-credit rating. You can't get much safer than that.And if you don't want to select individual bonds?
The Low-Cost Muni Bond OptionOption #1 above includes investing in a low-cost fund like the Vanguard Long-Term Tax-Exempt Fund ( VWLTX). The current yield is 4.21% and the average maturity is just over 10 years. Sure, it yields less than some individual bonds and there's no guarantee of principal. But it will be less volatile than 20- or 30-year bonds and you can reinvest monthly dividends if you're so inclined. (Those in high-tax states will want to choose a state-specific Vanguard fund, of course.) Want to play a potential muni-bond rebound more aggressively, with a higher yield and greater capital appreciation potential? Go for Option #2...
Why You Should Pick Up Tax-Free Bonds NowConsider the Nuveen Insured Municipal Opportunity Fund ( NIO). This closed-end fund also holds a portfolio of high-grade tax-free bonds. The annual expense ratio is 1%. Although this is higher than Vanguard, it's actually cheap by closed-end fund standards. Many closed-end funds have expenses that total more than 2% per year. This fund currently yields 6.5% and the income is exempt from federal taxes. If you reside in the top tax bracket, you'd have to earn 10% to get this after-tax yield. Why is it so high? Because the fund is using 41% leverage, the equivalent of buying bonds on margin.
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