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Want to Stay Away from Puerto Rico? Bet on These Muni ETFs

The present rocky investing backdrop has made muni bond ETFs a winner along with Treasury bonds. Most of the muni bond ETFs are in the green in the year-to-date frame and many have hit a 52-week high in the last few days. But do these deserve such love given Puerto Rico’s debt crisis (read: Puerto Rico Debt Worries Loom: 2 ETFs to Watch).

It is widespread news in the muni bonds’ investing world that Puerto Rico – a big issuer of muni bonds – runs a high risk of default. In early May, Puerto Rico defaulted on a $367 million in debt. Buried under recession for years, the island now bears a huge debt load of $72 billion and requires restructuring.

A year ago, Charles Schwab’s datarevealed that Puerto Rico’s debt obligation reached as high as 95% of its economic output. This was surprisingly higher than 2.4% of the median debt load for the 50 U.S. states. Needless to say, investing in Puerto Rico muni bonds or ETFs that are heavy on these bonds require a strong risk appetite.

This does not mean that investors should shy away from entire array of muni bond ETFs. After all, munis are safer bets than corporate bonds and yield better than treasuries. Notably, the yield on the 10-year Treasury note has slid 48 bps to 1.76% and the yield on the long-term 30-year bonds has seen a 39-bps plunge to 2.59% this year (as of May 17, 2016). 

Usually the interest income from munis is free of federal tax and occasionally even state taxes, making them particularly intriguing to investors falling in the high tax cohort looking to cut their tax burden (read: Worried About Taxes? Check 3 Muni Bond ETFs).

With the Fed still having a patient attitude on the rate hike issue this year, the higher yield nature of the munis should quench the thirst for current income. So, risk-averse investors can definitely play muni bond ETFs that are devoid of Puerto Rico exposure. Below we highlight a few such options. Notably, all the below-mentioned ETFs hit a 52-week high on May 17, 2016.

iShares National Muni Bond ETF (MUB)

MUB has a trailing 12-month yield of 2.33%. The product provides access to more than 3000 municipal bonds with higher credit quality. MUB has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: 5 ETFs for Portfolio Safety, Stability and Diversification).

SPDR Nuveen Barclays Municipal Bond ETF (TFI)

The $1.90-billion ETF holds 882 bonds in its portfolio. The fund charges 23 bps in fees and yields 1.85% annually (as of May 17, 2016). Moreover, this fund houses higher investment grade bonds. It has a Zacks ETF Rank #3 with a Medium risk outlook.

 VanEck Vectors AMT-Free Long Municipal Index ETF (MLN)

Devoid of any meaningful exposure to Puerto Rico, the top priorities of this fund are California (18.8%) and New York (13%). It yields 3.16% annually (as of May 17, 2016). More than half of the portfolio is high-quality in nature. It has a Zacks ETF Rank #3 with a High risk outlook.

Market Vectors AMT-Free Intermediate Muni ETF ITM
 
The fund replicates the performance of the medium-duration bonds. New York (16.4%), California (15.5%) and Texas (10.3%) have a double-digit exposure in the fund. The fund yields 2.22% annually (as of May 17, 2016). Investment grade bonds occupy a major share of the fund. It has aZacks ETF Rank #3 with a High risk outlook.

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SPDR-NB MUNI BD (TFI): ETF Research Reports
 
VANECK-AMT FLM (MLN): ETF Research Reports
 
VANECK-AMT FIM (ITM): ETF Research Reports
 
ISHARS-NAMTF (MUB): ETF Research Reports
 
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