I was doing a write-up about the new Medicare tax on net investment income, and one thing that struck me is that tax-exempt municipal bonds are one of the few income sources that won't be hit by it. We've always called those bonds triple-tax-free, because they aren't subject to federal, state, or local income taxes for residents of the places that issue them. Now that has to be updated to quadruple tax free, because their interest won't get hit by the Medicare tax on net investment income either.
A Google search for "quadruple tax free" turns up NO HITS vs over 100k for "triple tax free." Well, OK, I get 10, but none have anything to do with this. So, you heard it here first!
Good find; I assume they don't have to be issued from your own state to escape 0care tax? If so, whatdya think of HYD or other high yield muni funds?
HYD has almost double the yield and cap gain of generic national muni MUB over the last 6 months and thru the life of HYD. 5% yield and 14% cap gain last 12 months. Has a bit of Puerto Rican junk that is free of any state taxes, yet doesn't seem volatile thru it's short lifespan. More attractive to me than my state bond funds, which have absurd load fees... time to double up?
I think ETFs in less-liquid asset classes add risks that aren't present in the broad-market ones. The whole creation-redemption process is a bit of a black box as it is and intuitively, must do better when the underlying investments have readily-ascertainable values, and can be traded at low cost. There seems potential for a lot of slop when you get into something like an ETF holding high-yield municipal bonds, many of which just don't trade all that often (relatively speaking).
I just pulled up a holdings list for one of the HY Muni ETFs and put a CUSIP for one of the top holdings into EMMA. The recent trading history is very light so it isn't much to go on, but there was a 350+ basis point difference between a recent "customer sold" and "customer bought" price - by recent I mean within three days. On a single trade the spread looked to be about 35 bps. These are not small numbers.
A question I posed to one of the wholesalers who rang me up when these came out was: how does your ETF structure and market-making process deal with the peculiarities of this market - especially when munis get rattled? Even just coming up with bond values to determine NAV has some wiggle room in it. He didn't have an answer. I'd want to understand why that isn't a risk factor before diving into something that is, at the end of the day, yielding not really all that much - relative to a 350 basis point spread on trades executed just a couple days apart.
Rick Ferri wrote an interesting post about this about a year ago, entitled "Why we don't buy corporate bond ETFs". Mainly he's talking about junk bonds (which he gives great examples for), and the example for the more liquid investment-grade corporates don't show nearly the problem that the junk bonds had. Presumably the even more thinly traded HY munis would be even worse.
Here's a link:
The actively (or, perhaps semi-actively) managed ETFs may do better, but they are pretty new, so we won't really know for a while. But this kind of thing is one of the reasons, for example, why Pimco's junk bond ETFs may be better than the pure index-driven ones -- they don't need to worry about tracking error and can, theoretically, avoid some of those spread issues. Whether that works in practice, we'll just have to wait and see.
One of the reasons that there may be some particularly great values in CEFs when there are market rattles - when the NAV is that uncertain, and the underlying securities are highly illiquid, the price mechanism breaks down and therein may lie some great opportunities. That said, I don't generally mess around with that - too much uncertainty and liquidity risk -- if I can get a great deal on something because it's trading absurdly cheaply, then I may be in trouble on the other side of that trade when I need to get back out of it.
In reply to the concern that high yield muni etfs are poorly structured to follow the herd getting in or out... around now may be your opportunity to get in at a discount due to a bloodbath. I dont understand why they only now saw the possible loss of deductibility, or why these werent cushioned by their high rates even for nondeductible bonds, but...
P.S. below is a book authors amazing talk about financial crises of the 1800's which he shows are directly comparable to now rather than 1920/30 varieties. You may want to start around minute 44 to see the parallels and why he liquidated his ira at the perfect time in 2008.
He demonstrates this kind of interest rate crises cannot be diversified around, due to opacity between good and bad. Sounds like a timing approach is the only way to navigate, maybe like the "dufus" technique I suggested here early 2009. Anyway, when you get hooked, back up to video start to hear how wars of 1812,
1861, and the prewar rise of abe lincoln were all about such interest rate crises rather than stock market crises:
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