Here's Why Short-Term Muni Bond ETFs Might Seem Appealing

The United States municipal bond market has grown in assets in the final quarter of 2017. It inched up to $3.851 trillion in the fourth quarter from $3.809 trillion in the previous quarter, per a quarterly report from the Federal Reserve.

Although municipal bonds are not considered by investors when looking for market-beating returns, the current scenario calls for further research on the investment vehicle. These debt instruments provide a good diversifying opportunity to investors’ traditional portfolios.  

Why These ETFs Demand a Second Look?

The primary factor that makes these ETFs appealing is that the income earned is tax free. This is especially appealing for investors from high tax states. Although President Donald Trump’s tax reform initially pushed muni bond investing out of favor, the recent inflows’ report suggests that demand for such bonds has been strong.

The new tax law sets a ceiling for state and local deductions taxpayers can take at $10,000, making these investment vehicles attractive for investors with high tax bills.

There are multiple other factors that make muni bond investing attractive. U.S. markets recently suffered a sell-off owing to fears of rising rates. The S&P 500 entered correction territory, as it declined more than 10% from the record high set in January. Strong wage growth and jobs data introduced fears of inflation making a comeback and led investors to bet on aggressive rate hikes.

Short-term muni bonds are less sensitive to interest rate changes and as a result safeguard investors during uncertain times. Moreover, the markets are currently being weighed down by trade war fears.

Trump’s America First agenda has sparked fears of a trade war, as he signed a 25% tariff on steel imports and a 10% tariff on aluminum imports. Multiple nations including China and the European Union have already announced retaliatory measures but it remains to be seen how far they will be actually affected (read:Trump Tariffs: ETF Winners & Losers).

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