NEW YORK (ETF Expert) -- How does the state of California intend to combat its exorbitant debts? Left-leaning leaders have proposed higher income taxes on the "rich" as well as increasing sales taxes.Unfortunately, California already sits near the top of the country's taxation ladder. At present, top marginal bracket payers are shelling out nearly 10% -- close to three times the national average.
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.