Money Magazine has an interesting article in their March 2011 issue, “Profit from the Muni Mess.” We take a look at this article to see how valid the arguments it makes our and examine the municipal bond mutual fund recommendations it makes, for sensibility.
The article attempts to allay the fears of most investors by looking at default risk, bankruptcy, comparisons to Greece, and some recommendations on diversification beyond your state’s borders. It suggests readers by funds with AA or better average credit quality, which we agree with. He also does not like high-yield funds, especially those that invest 25% or more in unrated bonds. The article mentions nothing about duration, which we think is important in a possible .rising interest rate environment.
Two municipal bond mutual funds recommended for safety seekers in the article, are The Vanguard Intermediate-Term Tax-Exempt Fund (VWITX) and the State Farm Municipal Bond Fund (SFBDX). The also recommends 3 funds for opportunity seekers, which we deemed a little too aggressive for our “Safe bond portfolio”.
The Vanguard fund is rated four-star by Morningstar, has a AA average credit quality, has a low expense ratio, but has a moderately long duration of 5.8 years and an average maturity of 6.7 years. We would prefer our fund that has a duration under 4 years.
The State Farm fund is rated 5 star by Morningstar, has a AA average credit quality, has a low expense ratio, but has an even longer average duration of 7 years and an average maturity of over 10 years. Way too long for us, but still a high-quality fund that might fit your risk profile.
Check out the graph below showing these 2 funds along with a Vanguard limited maturity municipal bond fund that we prefer. The time horizon is the last 6 months, so you can see some of the volatility that has occurred.
Additional Related Municipal Bond Educational Articles:
What are municipal bonds?
How to Research Municipal Bonds
The Risks of Owning Municipal Bonds
How to Buy And Sell Municipal Bonds
Municipal Bond Mutual funds – Municipal Bond Managed Accounts
What Are Closed-end Municipal Bond Funds?