US Municipal Bonds [Invesco US Municipal Bond UCITS ETF Dis]

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MrCurious
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US Municipal Bonds [Invesco US Municipal Bond UCITS ETF Dis]

Post by MrCurious »

Hi guys,

A new ETF has been recently launched that offers exposure to US municipal bonds:
Invesco US Municipal Bond UCITS ETF Dist

Now, I understand that muni bonds have certain tax advantages for US investors.

I am curious if there are any advantages for non-US investors (e.g. higher yield than government bonds)?
Valuethinker
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Re: US Municipal Bonds

Post by Valuethinker »

MrCurious wrote: Thu May 06, 2021 11:26 am Hi guys,

A new ETF has been recently launched that offers exposure to US municipal bonds:
Invesco US Municipal Bond UCITS ETF Dist

Now, I understand that muni bonds have certain tax advantages for US investors.

I am curious if there are any advantages for non-US investors (e.g. higher yield than government bonds)?
AFAIK the opposite. Because they are attractive to US investors in high tax brackets, they have lower yields than their credit rating justifies.
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anon_investor
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Re: US Municipal Bonds

Post by anon_investor »

MrCurious wrote: Thu May 06, 2021 11:26 am Hi guys,

A new ETF has been recently launched that offers exposure to US municipal bonds:
Invesco US Municipal Bond UCITS ETF Dist

Now, I understand that muni bonds have certain tax advantages for US investors.

I am curious if there are any advantages for non-US investors (e.g. higher yield than government bonds)?
I know that some foreign equity ETFs held my people in the US have foreign taxes withheld from the dividends, which have to be recouped via foreign tax credits on US tax returns. I wonder a foreign investor would be able to avoid some kind of required US withholding tax by having US muni bonds.
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galeno
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Re: US Municipal Bonds

Post by galeno »

I wouldn't touch them. Far better is a UCITS ETF of intermediate term US treasuries. E.g. VDTY.
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Re: US Municipal Bonds

Post by typical.investor »

MrCurious wrote: Thu May 06, 2021 11:26 am Hi guys,

A new ETF has been recently launched that offers exposure to US municipal bonds:
Invesco US Municipal Bond UCITS ETF Dist
Interesting.
MrCurious wrote: Thu May 06, 2021 11:26 am Now, I understand that muni bonds have certain tax advantages for US investors.
Correct but it depends on the municipal bond. Some are taxable and there is no disadvantage to foreign investors.

Understand that many local governments and nonprofits issue taxable bonds to finance projects that don’t meet the IRS’s tax exemption requirements. These cases may include things such as a sports stadium or a college student center that has a significant amount of space devoted to a bookstore managed by a national chain and/or a food court or restaurant.

Also, during the US recovery from the Great Recession, the US Congress created new types of taxable municipal via the American Recovery and Reinvestment Act (ARRA). The munis are taxable to investors (and thus must yield higher rates) but subsidized by the US Govt to reduce borrowing costs for the issuer.

In the past year or so, I believe there was a run of months where between 15% and 40% of municipal bonds issued each month were taxable. I believe they are roughly a quarter of the municipal bond market now.

MrCurious wrote: Thu May 06, 2021 11:26 am I am curious if there are any advantages for non-US investors (e.g. higher yield than government bonds)?
Yes, I believe there are definitely advantages. Higher credit ratings than average for munis. Better yield and lower defaults rates than corporates.

https://www.schwab.com/resource-center/ ... ipal-bonds
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Re: US Municipal Bonds

Post by dcabler »

Valuethinker wrote: Thu May 06, 2021 3:59 pm
MrCurious wrote: Thu May 06, 2021 11:26 am Hi guys,

A new ETF has been recently launched that offers exposure to US municipal bonds:
Invesco US Municipal Bond UCITS ETF Dist

Now, I understand that muni bonds have certain tax advantages for US investors.

I am curious if there are any advantages for non-US investors (e.g. higher yield than government bonds)?
AFAIK the opposite. Because they are attractive to US investors in high tax brackets, they have lower yields than their credit rating justifies.
Yup - if you're a US investor you really need to look at your own tax bracket, and consider your state income tax situation. Muni's are on my radar but not because I'm enamored with them. Mainly it's because I can see a situation where rebalancing out of stock into bonds over time would result in me running out of stock in my tax advantaged space, meaning I'd likely have to buy bonds in my taxable account. I already own and continue to purchase Ibonds but given the purchase limits, that's unlikely to move the needle much. There are certainly worse problems to have. :D
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Re: US Municipal Bonds

Post by abuss368 »

MrCurious wrote: Thu May 06, 2021 11:26 am Hi guys,

A new ETF has been recently launched that offers exposure to US municipal bonds:
Invesco US Municipal Bond UCITS ETF Dist

Now, I understand that muni bonds have certain tax advantages for US investors.

I am curious if there are any advantages for non-US investors (e.g. higher yield than government bonds)?
Excellent question. I am unsure but you may consider checking with a qualified tax CPA.

Tony
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Re: US Municipal Bonds

Post by abuss368 »

galeno wrote: Thu May 06, 2021 6:21 pm I wouldn't touch them. Far better is a UCITS ETF of intermediate term US treasuries. E.g. VDTY.
Excellent advice.
Tony
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Re: US Municipal Bonds

Post by typical.investor »

abuss368 wrote: Fri May 07, 2021 6:34 am
MrCurious wrote: Thu May 06, 2021 11:26 am Hi guys,

A new ETF has been recently launched that offers exposure to US municipal bonds:
Invesco US Municipal Bond UCITS ETF Dist

Now, I understand that muni bonds have certain tax advantages for US investors.

I am curious if there are any advantages for non-US investors (e.g. higher yield than government bonds)?
Excellent question. I am unsure but you may consider checking with a qualified tax CPA.

Tony
Sigh ... do people normally check with a CPA every time they buy a taxable bond? There is nothing special about taxable municipal bonds. They are bonds that are taxable.

Foreigners can hold US treasuries. Do non-US people need to consult a CPA to buy treasuries? Really?

I guess there is just a lack of familiarity with taxable municipal bonds here ... fun fact ... they are the fastest-growing sector in U.S. fixed income. Another fun fact ... after the 2017 tax cuts and jobs act, municipal bond refundings must now be done in the taxable market.

Maybe people are familiar with Build America Bonds. This fund that the OP mentions is a mirror strategy of the US-listed Invesco Taxable Municipal Bond ETF (BAB) which has $2.4bn (AUM) since launch in 2009.
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Re: US Municipal Bonds

Post by abuss368 »

typical.investor wrote: Fri May 07, 2021 6:46 am
abuss368 wrote: Fri May 07, 2021 6:34 am
MrCurious wrote: Thu May 06, 2021 11:26 am Hi guys,

A new ETF has been recently launched that offers exposure to US municipal bonds:
Invesco US Municipal Bond UCITS ETF Dist

Now, I understand that muni bonds have certain tax advantages for US investors.

I am curious if there are any advantages for non-US investors (e.g. higher yield than government bonds)?
Excellent question. I am unsure but you may consider checking with a qualified tax CPA.

Tony
Sigh ... do people normally check with a CPA every time they buy a taxable bond? There is nothing special about taxable municipal bonds. They are bonds that are taxable.

Foreigners can hold US treasuries. Do non-US people need to consult a CPA to buy treasuries? Really?

I guess there is just a lack of familiarity with taxable municipal bonds here ... fun fact ... they are the fastest-growing sector in U.S. fixed income. Another fun fact ... after the 2017 tax cuts and jobs act, municipal bond refundings must now be done in the taxable market.

Maybe people are familiar with Build America Bonds. This fund that the OP mentions is a mirror strategy of the US-listed Invesco Taxable Municipal Bond ETF (BAB) which has $2.4bn (AUM) since launch in 2009.
Are municipal bonds going to lose their federal tax exempt status?

Tony
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Re: US Municipal Bonds

Post by typical.investor »

abuss368 wrote: Fri May 07, 2021 8:57 am
typical.investor wrote: Fri May 07, 2021 7:34 am
abuss368 wrote: Fri May 07, 2021 7:31 am
typical.investor wrote: Fri May 07, 2021 6:46 am
abuss368 wrote: Fri May 07, 2021 6:34 am

Excellent question. I am unsure but you may consider checking with a qualified tax CPA.

Tony
Sigh ... do people normally check with a CPA every time they buy a taxable bond? There is nothing special about taxable municipal bonds. They are bonds that are taxable.

Foreigners can hold US treasuries. Do non-US people need to consult a CPA to buy treasuries? Really?

I guess there is just a lack of familiarity with taxable municipal bonds here ... fun fact ... they are the fastest-growing sector in U.S. fixed income. Another fun fact ... after the 2017 tax cuts and jobs act, municipal bond refundings must now be done in the taxable market.

Maybe people are familiar with Build America Bonds. This fund that the OP mentions is a mirror strategy of the US-listed Invesco Taxable Municipal Bond ETF (BAB) which has $2.4bn (AUM) since launch in 2009.
Are municipal bonds going to lose their federal tax exempt status?

Tony
Lose? If you don’t understand municipal bonds, perhaps you shouldn’t give advice on them.

Taxable municipal bonds never had federal tax exempt status. So no they can’t lose something they don’t have.

The fund mentioned in the OP holds taxable bonds. It’s that simple.
So I used “lose”. Get the choice of words. Same point however!

Happy Friday!

Tony
You are really making no sense to me. If you are asking the future if US tax policy, that’s beyond what’s discussed in this forum.

I don’t see how the question is related to the OP so I am confused. I maybe misinterpreted your reply to indicate you still believed all munis are tax-exempt. That’s not been true for decades ...
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Re: US Municipal Bonds [Invesco US Municipal Bond UCITS ETF Dis]

Post by LadyGeek »

I removed a few contentious posts. Please stay on-topic, which is to discuss advantages of a non-US investor holding a non-US domiciled fund containing US municipal bonds.
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Re: US Municipal Bonds [Invesco US Municipal Bond UCITS ETF Dis]

Post by LadyGeek »

Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
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Re: US Municipal Bonds [Invesco US Municipal Bond UCITS ETF Dis]

Post by neurosphere »

This thread is a good reminder to me that "municipal" does not necessarily equal "tax-exempt". However, I/we/BH frequently use the shorthand "munis" or whatever when referring specifically to tax-exempt municipal bonds. And then of course there are tax-exempt bonds which are potentially subject to the alternative minimum tax. So I appreciate the question and the discussion. I wonder if we should be encouraging the use of Tax-Exempt (TE) when appropriate. Hmm. I know I always refer to Vanguards TE bond funds as "municipal bond" funds. Which they are of course, but... :)
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Re: US Municipal Bonds [Invesco US Municipal Bond UCITS ETF Dis]

Post by Valuethinker »

MrCurious wrote: Thu May 06, 2021 11:26 am Hi guys,

A new ETF has been recently launched that offers exposure to US municipal bonds:
Invesco US Municipal Bond UCITS ETF Dist

Now, I understand that muni bonds have certain tax advantages for US investors.

I am curious if there are any advantages for non-US investors (e.g. higher yield than government bonds)?
If you will note my chain of logic, if there are such tax advantages for US investors, it would lead to *lower* yields, not higher-- they would accept a lower yield on the bonds, because after tax the yield would be equivalent to, or better than, bonds without those tax exempt features.

Turns out there are non tax exempt municipal bonds in the US (as they say in New York "who knew?"). So you'd be picking up an illiquidity premium (the bonds would be much harder to trade than comparable US Treasury bonds, say) and a credit premium (higher default risk than same).

In 2008-09, and again in 2020, municipal and state revenues fell sharply, and there were deteriorations of credit quality. In other words, in big event risk type scenarios like the Global Financial Crisis or the Covid-19 emergency, systemic forces hurt these very types of bonds - again compared to US Treasuries. It's not a given that the US Federal government will always bail out states and municipalities due to tax shortfalls associated with recessions, and certainly many of the bonds therein may be of lower quality project type bonds (tied to the economic success or failure of particularly developments like stadiums etc, but without general recourse to local taxation revenues). As Larry Swedroe is always pointing out with municipal bonds - you have to do your homework.

I do remember that when the US Municipal Bond ETFs first came out, New York City and also the MTA (the transit authority) were a disproportionate fraction of the bonds held therein. Don't know if that is still the case. But one was basically betting on New York.

Other than a terrorist attack, we could not then imagine a scenario where demand on the world's busiest Metros (New York & London although Tokyo and Beijing are probably OK) would fall by 2/3rds, and stay down for over a year. And then came Covid-19...

Reaching for yield is not usually a good idea, because there has to be a commensurate increase in credit risk (normally). Higher yield means you are buying a higher risk asset.
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Re: US Municipal Bonds [Invesco US Municipal Bond UCITS ETF Dis]

Post by galeno »

I understand Costa Rican municipal bonds. I wouldn't touch them.

I don't understand USA municipal bonds. I don't want or need to understand them. Of course, I wouldn't touch them either.

My favorite bond UCITS ETFs in this order: AGGG (non-hedged WB), VAGU (hedged WB), VDTY (treas), VDCP (corps), and IDTP (TIPS).

Why would a non-US investor prefer US municipal bonds vs treas, corps, or TIPS?
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Re: US Municipal Bonds [Invesco US Municipal Bond UCITS ETF Dis]

Post by typical.investor »

galeno wrote: Fri May 07, 2021 1:58 pm Why would a non-US investor prefer US municipal bonds vs treas, corps, or TIPS?
Better yield than treasuries but less credit risk than corporates for similar yield.

Schwab has a good look at them at https://www.schwab.com/resource-center/ ... ipal-bonds
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Re: US Municipal Bonds [Invesco US Municipal Bond UCITS ETF Dis]

Post by galeno »

Interesting read. What % of your FI allocation are you thinking about?
typical.investor wrote: Fri May 07, 2021 5:13 pm
galeno wrote: Fri May 07, 2021 1:58 pm Why would a non-US investor prefer US municipal bonds vs treas, corps, or TIPS?
Better yield than treasuries but less credit risk than corporates for similar yield.

Schwab has a good look at them at https://www.schwab.com/resource-center/ ... ipal-bonds
KISS & STC.
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Re: US Municipal Bonds [Invesco US Municipal Bond UCITS ETF Dis]

Post by typical.investor »

galeno wrote: Fri May 07, 2021 6:24 pm Interesting read. What % of your FI allocation are you thinking about?
typical.investor wrote: Fri May 07, 2021 5:13 pm
galeno wrote: Fri May 07, 2021 1:58 pm Why would a non-US investor prefer US municipal bonds vs treas, corps, or TIPS?
Better yield than treasuries but less credit risk than corporates for similar yield.

Schwab has a good look at them at https://www.schwab.com/resource-center/ ... ipal-bonds
If you are asking me, I have 35% in tax exempt municipal bonds because I am a US investor and benefit from the tax break.

I did not consider taxable municipal bonds because I want treasuries to rebalance in an equities downturn and also have a large percent in long duration brokered CDs (10+ year maturities pay 3+%).

As the CDs mature in a few years, I guess I will consider replacing the CDs with taxable bonds but that depends on the tax environment, MYGA rates, available tax sheltered space etc.

I think I am willing to go as high as 40% of fixed income in municipals (whether tax exempt or not) from a credit standpoint. Taxable municipals are generally higher credit too I believe.

There are concerns with munis from a pension liability standpoint especially for the worst States/cities but they seem to have weathered COVID well. Booming property values and higher revenue for many localities isn’t going to hurt.

I watch the space periodically for credit changes. I guess that’s why I am familiar with taxable municipals.
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Re: US Municipal Bonds [Invesco US Municipal Bond UCITS ETF Dis]

Post by galeno »

Ineresting topic.

Before we (wife and I) decided that the super simple 2 UCITS ETF port was for us we used 6 UCITS ETFs. 3 for equity and 3 for FI.

For equities: 80% VWRD + 10% WSML + 10% VDEM. Now we are 100% VWRD.

For FI: 30% VDTY (treas) + 30% VDCP (corps) + 30% IDTP (tips)+ 10% CASH. Now we are 90% AGGG + 10% CASH.

If we had not gone to just one bond UCITS ETF how would you add the municipal bond UCITS ETF?

Sell half of the VDCP (corps) and hold 15% of each? Or go 22.5% for the 4 UCITS ETFs + 10% CASH?

The 10% of FI (5% of port) in CASH is a MUST for us.
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Re: US Municipal Bonds [Invesco US Municipal Bond UCITS ETF Dis]

Post by typical.investor »

galeno wrote: Sat May 08, 2021 7:21 am Ineresting topic.

Before we (wife and I) decided that the super simple 2 UCITS ETF port was for us we used 6 UCITS ETFs. 3 for equity and 3 for FI.

For equities: 80% VWRD + 10% WSML + 10% VDEM. Now we are 100% VWRD.

For FI: 30% VDTY (treas) + 30% VDCP (corps) + 30% IDTP (tips)+ 10% CASH. Now we are 90% AGGG + 10% CASH.

If we had not gone to just one bond UCITS ETF how would you add the municipal bond UCITS ETF?

Sell half of the VDCP (corps) and hold 15% of each? Or go 22.5% for the 4 UCITS ETFs + 10% CASH?

The 10% of FI (5% of port) in CASH is a MUST for us.
Either of those choices really seems fine. I’d probably go for the 4 UCITS version though because I think it’d yield more. And if stocks fell hard, I might sell treasuries down below 22.5% to pick up stocks. But that kinda depends on age and risk tolerance at that point.

90% AGGG + 10% CASH? Wow that’s heavy on the corporates. Why did you choose that? For the global exposure and higher yield? Not planning to try and rebalance after an equities crash?

Taxable municipals might be a good diversifier to AGGG but maybe you don’t want the increased USD exposure or just prefer simplicity.
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Re: US Municipal Bonds [Invesco US Municipal Bond UCITS ETF Dis]

Post by galeno »

AGGG

Exposure vs. Category
Sectors Fund % Cat %
Government 65.11 36.63
Municipal 0.19 0.01
Corporate 18.52 9.34
Securitized 8.98 2.41
Cash & Equivalents 7.19 3.94
Other 0.00 47.67

65% govt.+ 9% Secutitized = 74%.

We are NON US investors. We want WORLD BONDS which means about 40% USD bonds to balance our world equities which hold 55% US equities.

You are a US investor. If we were US investors we would hold VTI and BND. Very different POV.
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Re: US Municipal Bonds [Invesco US Municipal Bond UCITS ETF Dis]

Post by typical.investor »

galeno wrote: Sat May 08, 2021 8:44 am AGGG

Exposure vs. Category
Sectors Fund % Cat %
Government 65.11 36.63
Municipal 0.19 0.01
Corporate 18.52 9.34
Securitized 8.98 2.41
Cash & Equivalents 7.19 3.94
Other 0.00 47.67

65% govt.+ 9% Secutitized = 74%.

We are NON US investors. We want WORLD BONDS which means about 40% USD bonds to balance our world equities which hold 55% US equities.

You are a US investor. If we were US investors we would hold VTI and BND. Very different POV.
That’s a great fund. When I tried to look it up in google, I just happened to select the one link that was for a corporate bond fund. Morningstar only gave an ISIN number and not a ticker so I didn’t realize I was on the wrong page. Oops, I thought you’d moved to all corporates which didn’t make sense to me. My bad.
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Re: US Municipal Bonds [Invesco US Municipal Bond UCITS ETF Dis]

Post by galeno »

No prob.

I use morningstar.co.uk and the funds' main sites when I want to check out a fund.

Since I only use Vanguard and Ishares UCITS ETFs it's easy.

Better ballast. That's why I went with the unhedged vs the USD hedged. Which has lower volatility.
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