James Colby has more than 30 years of fixed income experience. Portfolio Manager of Municipal Bond ETFs at VanEck, he is known for his perspective on the U.S. municipal bond marketplace.
If you have not asked yourself this question, then you may either be blissfully unaware of the cacophony raised as investors rush out the exit marked "equity" based on fund flow data from Morningstar, or your expectations might be so low for investment returns that you've turned to watching re-runs of AMC's Mad Men. With everything seemingly in freefall – including yields – I offer my opinion as follows: Do nothing at your own peril. To default to cash means paying someone else for the opportunity to hold your money, for nothing. With the Fed signaling that rates are likely to remain low for some time, one needs to choose an investment strategy that provides liquidity, generates an income stream and avoids the clouds of uncertainty through diversification.
In my view, fund structures such as ETFs may achieve these points. Offered in a wide variety of strategies, investors have the potential to match their tolerance for credit and/or interest rate risk. For example, municipal bond ETFs with duration targets such as short, intermediate or long. Currently municipal bonds offer taxable-equivalent returns greater than those offered in the U.S. Treasury or U.S. corporate bond markets1.
Despite the offering of Warren Buffett on the topic of diversification when he said, "Put all your eggs in one basket and then watch that basket very carefully," I believe most investors may not have the luxury of Buffett's expertise. Diversification in the municipal world seeks to protect against the unknowable, and a way to perhaps keep those eggs from cracking.
1Source: Barclays Municipal Credit Research, May 2012.
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Municipal bonds are subject to risks related to litigation, legislation, political change, conditions in underlying sectors or in local business communities and economies, bankruptcy or other changes in the issuer’s financial condition, and/or the discontinuance of taxes supporting the project or assets or the inability to collect revenues for the project or from the assets. Bonds and bond funds will decrease in value as interest rates rise. Additional risks include credit, interest rate, call, reinvestment, tax, market and lease obligation risk. High-yield municipal bonds are subject to greater risk of loss of income and principal than higher-rated securities, and are likely to be more sensitive to adverse economic changes or individual municipal developments than those of higher-rated securities. Municipal bonds may be less liquid than taxable bonds.
The income generated from some types of municipal bonds may be subject to state and local taxes as well as to federal taxes on capital gains and may also be subject to alternative minimum tax.
Diversification does not assure a profit or protect against loss.
Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of a fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com/etfs. Please read the prospectus and summary prospectus carefully before investing.
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