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A new way to invest in your community

Marketplace Staff Dec 14, 2007

A new way to invest in your community

Marketplace Staff Dec 14, 2007


Tess Vigeland: How’d you like to own a piece of your state or city?

The traditional way is through municipal bonds. You loan the city or state some money for roads and hospitals and such and you get back interest on that investment over time.

Well there’s a new way to get in on that action: The muni bond exchange-traded fund — ETF.

Tom Anderson wrote about them recently for Kiplinger’s Magazine.

Vigeland: Tom, I’ve got to ask: what’s the attraction here? Munis will generally put you to sleep, won’t they?

Tom Anderson: Well, the big draw for a muni bond ETF is it’s low cost. A traditional muni bond fund has an average cost of about 1 percent. Also, a muni bond ETF, as opposed to a muni bond mutual fund, takes away the risk of a manager picking the wrong municipal bonds because a muni bond ETF tracks an index of municipal bonds.

Vigeland: Are there any differences in how muni bond ETFs and muni bond mutual funds are bought and sold?

Anderson: Certainly. Municipal bond ETFs trade like stocks, so that means you have to purchase them through a brokerage account and you will be charged a commission every time you buy, whereas traditional mutual funds, you can contribute, let’s say once a month or however often, and you won’t be charged a commission. So what that means, Tess, is that muni bond ETFs are great if you have a lump sum to invest, but if you’re going to invest a little bit each month, a regular muni bond mutual fund may be a better choice because you don’t have to pay commissions every time you invest.

Vigeland: So how many muni bonds do you end up investing in if you buy an ETF? It seems like it would be in the thousands.

Anderson: No. Well, actually, they buy a basket of municipal bonds that are designed to replicate the returns you would get if you invested in the wide range of municipal bonds that the index tracks. So really what you end up with is about 60 mutual bonds, but it varies fund to fund.

Vigeland: You know, these take what is a relatively mild, even boring, investment and it turns it into an exchange traded fund, which is generally, I think, more complicated. Why do this?

Anderson: Unlike the stock market, the muni bond market isn’t centralized, so buying an individual muni bond takes some work. So, an ETF can help a less savvy investor buy muni bonds more easily and a lot of investors just prefer the transparency of investing in exchange traded funds as opposed to traditional mutual funds.

Vigeland: What kind of investor is this appropriate for?

Anderson: I think it’s appropriate for investors who want to buy municipal bonds but don’t know what kind of municipal bonds they want to buy. I would also say these are mainly products for people who are in high income tax brackets and municipal bonds and municipal bond ETFs should always be held in taxable accounts so you can get the biggest benefit from holding them.

Vigeland: Tom Anderson is a writer with Kiplinger’s Personal Finance Magazine. Thanks for your time.

Anderson: Thank you Tess.

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