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Fear Higher Taxes? Then Buy These Tax-Free High Yielders

1. iShares S&P Natnl AMT – Free Munpl Bd Fd (NYSEARCA:MUB)
This is the highest volume and most liquid municipal bond ETF in the market, with average daily volume of 248,000 and about $3.5 billion in assets under management. The MUB corresponds to the performance of the S&P National AMT-Free Municipal Bond Index, an index of investment-grade municipal bonds. With a stated yield of almost 3%, high earners can easily reach into a 4% effective yield with special tax treatment on income. With an expense ratio of 0.25%, slightly below the category average of 0.28%, this muni bond ETF is also a great bargain right now.

Fear Higher Taxes? Then Buy These Tax-Free High Yielders

2. Market Vectors High Yield Muni. Ind (NYSEARCA:HYD)
This is also a municipal bond index fund, seeking to replicate price and yield of the Barclays Capital Municipal Custom High-Yield Composite Index. With high-yield carrying exposure to lower credit grades, this ETF has an outsized stated yield of nearly 5%, the highest of the group. This has attracted plenty of interest from investors seeking protection from the tax man, with average daily volume of 275,000 and a little more than $1 billion in assets under management. And with an expense ratio of 0.35% also below its category average of 0.40%, this municipal bond ETF is another great Retirement Savings Stock.

3. Market Vectors Long Municipal Index (NYSEARCA:MLN)
This municipal bond ETF corresponds to the price and yield of the Barclay Capital AMT-Free Long Continuous Municipal index. With exposure to longer-dated maturities, this ETF is a little more volatile than most municipal bonds and bond funds. But investors are compensated for that extra risk, rewarded with a stated yield of almost 4% that once again beats Treasuries and investment-grade corporate bonds. This is a relatively small municipal bond fund, with average daily volume of 40,000 sharply lower than the previous two ETFs, but still providing plenty of liquidity for most investors. Assets under management are $120 million, and with an expense ratio of 0.24% below the category average of 0.28%, this ETF is another great way to cut fees and reduce taxes.

Fear Higher Taxes? Then Buy These Tax-Free High Yielders

Risks to Consider: Muni bonds are not totally immune to fiscal issues. Many municipalities are battling financial problems of their own, which could potentially weight on asset values and capital gains in the long run. Although it is highly unlikely, new fiscal cliff legislation could compromise the tax benefits of municipal bonds as politicians look for more revenue to fund an outsized deficit.

Action to Take –> Municipal bonds have always been great tax shelters, especially for high earners and retirees. But with the fiscal cliff creating uncertainty over taxes, there have been big capital inflows into the group in the past few months. In spite of those gains, municipal bonds are still one of the few assets that offer tax-exempt income. And with the fiscal cliff approaching, investors looking to reduce their tax liability can only benefit from the tax-free yields of the muni bonds.

This article was originally written by Michael Vodicka, and posted on StreetAuthority.

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