"The sweet spot for the government agencies appears to be between five to 15 or 17 years. The munis aren't quite as attractive there. They start to get attractive at 17 to 20 years out," he adds.
It's one thing to select various bond maturities for a ladder; it's another to select the right bonds. Some advisers say the vast majority of do-it-yourselfers should stick with mutual funds and exchange-traded funds (ETFs) when it comes to stocks and bonds.
"There's an adage with respect to investing that nobody should own anything they can get killed at," says Leonard Wright, certified public accountant and CFP, in San Diego.
"People like to own something individually to see it on the statement, but I think for the typical investor that's where muni bond mutual funds or ETFs come into play. You get widespread diversification and you have an ability to spread your risk among multiple municipal entities. If an individual bond goes bad you could lose 15 percent of your portfolio, or if it stops paying interest it could be a high percentage of your income stream."
There are hundreds of mutual funds that specialize in municipal bonds. You'll find ones focusing on short-term, intermediate, or long-term bonds, high income, AMT-free, and, of course, a variety of state-specific funds. There are fewer exchange-traded funds available but that number will undoubtedly grow as investors turn to ETFs to get muni exposure, says Matthew Tucker, head of fixed-income strategy at Barclays Global Investors, which created iShares ETFs. IShares offers four municipal bond ETFs.
"If you buy a bond ladder you're typically buying a series of individual bonds and then as the bonds mature you're reinvesting by buying the longer maturity bond. Essentially you're perpetuating that ladder," Tucker says.
"The nice thing about the ETF structure is because it's a managed fund you're getting that management for you. For S&P National Municipal Bond Fund (MUB), Barclays will invest in a broad selection of muni bonds across the curve. As bonds mature we do the rebalancing for the investor. So, they can buy one product, the ETF, and get that rebalancing built in."
Whether you delve into munis through individual bonds or mutual funds or ETFs will depend in large part on your investment philosophy, risk tolerance, and long-term goals. The availability of individual bonds for $1,000 each on sites such as Fidelity, and the rise in bond ETFs enable most investors to participate in these areas of the market. It's relatively cheap diversification.
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