Considering Muni bond ETFs for my Taxable account

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Topic Author
tiburblium
Posts: 4
Joined: Thu Apr 11, 2019 4:28 pm

Considering Muni bond ETFs for my Taxable account

Post by tiburblium » Sat Apr 13, 2019 4:59 pm

Hi Bogleheads,

I have a taxable brokerage account with Schwab, currently the fixed income portion of this account is 100% T-bills and I was considering switching that to be primarily composed of a muni bond fund ETF.

Me:
Age: 37, married filing jointly
Income: $200,000
Residence: USA, Atlanta, Georgia
Federal Tax Rate: 24%
State Tax: 5.5% (projected to be lowered to 5.0% for 2020)
Emergency Fund: $50,000
Other Accounts: Rollover IRA $700,000, 401k $50,000, 529s $50,000, Roth IRAs $60,000
Debt: None (home paid off)

Taxable Account Value: $370,000
Annual contribution to this account: $40,000
AA: 70/30 ($260,000/$110,000)

Stock allocation:

VTI (50%)
VXUS (20%)
IJS (20%)
VWO (10%)

Bond allocation current:

3 Month Treasury Bills (100%)

Bond Proposed allocation:

MUB - iShares National Muni Bond ETF (80%)
3 Month Treasury Bills (20%)

Reasoning:

Based on 30-Day SEC yield of 2.2%, I calculated the tax effective yield of MUB to be 2.76%. Compared to a tax effective yield of 1.8% for the 2.4% 3 month t-bills. An improvement of 0.94%.

My plan is to hold this position long term and proportionally add to it overtime. I looked for Georgia only muni-funds, but from what I found the ER these funds exceeded the state tax savings that I would be paying with MUB. (One example: T. Rowe Price Georgia Tax-Free Bond Fund MUTF: GTFBX)

MUB link: https://www.ishares.com/us/products/239 ... i-bond-etf

Questions:

1.) I read so much negative press on bonds, but that tends to be focused on corporate bonds and high yield corporate. I realize that the MUB muni fund has an average duration of ~6 years there will be interest rate risk, but if you have a national muni fund I am assuming the default/downgrade risk is much less significant vs corporate. Any opinions on this?

2.) Is there a national Muni fund/etf that you like more than MUB?

3.) Any reason you wouldn't suggest taking a large (80%) muni position of bond allocation in taxable in my situation?

Thanks for reading!

ohai
Posts: 362
Joined: Wed Dec 27, 2017 2:10 pm

Re: Considering Muni bond ETFs for my Taxable account

Post by ohai » Sat Apr 13, 2019 5:16 pm

I hold HYD, HYMB and NZF. These have probably worse credit than what you described above, but a low 2% return is is not enough for me to take money away from stocks and other things.

Sort of related - I notice a lot of closed end muni funds are/were trading at huge discounts to NAV. I bought about $100k of NZF for example, when it was at something like -7.5% to NAV and today it is around -4.3%. I'm not sure how they are marking their holdings or if this matters.

mega317
Posts: 2892
Joined: Tue Apr 19, 2016 10:55 am

Re: Considering Muni bond ETFs for my Taxable account

Post by mega317 » Sat Apr 13, 2019 5:23 pm

tiburblium wrote:
Sat Apr 13, 2019 4:59 pm

Reasoning:

Based on 30-Day SEC yield of 2.2%, I calculated the tax effective yield of MUB to be 2.76%. Compared to a tax effective yield of 1.8% for the 2.4% 3 month t-bills. An improvement of 0.94%.
This is not a relevant comparison because MUB is significantly riskier than 3 month treasuries, of course it yields more. More helpful would be comparing MUB to a taxable bond fund with similar risk. I think you'll find in the 24% bracket it's really close.

Also I didn't recheck your math but your effective yield numbers seem off. Why did the MUB number increase and the treasuries decrease?

depressed
Posts: 104
Joined: Sun Oct 14, 2018 4:07 pm

Re: Considering Muni bond ETFs for my Taxable account

Post by depressed » Sun Apr 14, 2019 10:09 am

tiburblium wrote:
Sat Apr 13, 2019 4:59 pm

Reasoning:

Based on 30-Day SEC yield of 2.2%, I calculated the tax effective yield of MUB to be 2.76%. Compared to a tax effective yield of 1.8% for the 2.4% 3 month t-bills. An improvement of 0.94%.
I suggest that you take the state taxes into account and consider only the after-tax yield of the two possible investments. Here is the computation (which still ignores some factors, such as compounding periods):
  • MUB has a federal tax-exempt yield of: 2.20%,
  • and after taking state tax into account, MUB has a take-home yield of about 2.09% (computed as 2.2% x 0.95).
  • The t-bills have a yield of 2.4%,
  • and after taking federal tax into account, the t-bills have a take-home yield of about 1.82% (computed as 2.4% x 0.76).
  • So this comparison gives MUB a 0.27% advantage over the t-bills.
As others have pointed out, MUB has higher risks, for both defaults and interest-rate changes. I don't know whether the 0.27% take-home advantage adequately compensates for those risks.

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AllieTB1323
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Location: Desert Washington State

Re: Considering Muni bond ETFs for my Taxable account

Post by AllieTB1323 » Sun Apr 14, 2019 10:26 am

ohai wrote:
Sat Apr 13, 2019 5:16 pm
I hold HYD, HYMB and NZF. These have probably worse credit than what you described above, but a low 2% return is is not enough for me to take money away from stocks and other things.

Sort of related - I notice a lot of closed end muni funds are/were trading at huge discounts to NAV. I bought about $100k of NZF for example, when it was at something like -7.5% to NAV and today it is around -4.3%. I'm not sure how they are marking their holdings or if this matters.
These closed end muni funds, NZF, LEO, NAD etc use leverage to push their distributions up.

if interested use https://www.cefconnect.com to determine the discounts to the NAV, the leverage and distribution yields.

I hold minor positions in NAD and VMO in a taxable account and reinvest the monthly distributions.

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grabiner
Advisory Board
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Re: Considering Muni bond ETFs for my Taxable account

Post by grabiner » Sun Apr 14, 2019 10:40 am

depressed wrote:
Sun Apr 14, 2019 10:09 am
tiburblium wrote:
Sat Apr 13, 2019 4:59 pm

Reasoning:

Based on 30-Day SEC yield of 2.2%, I calculated the tax effective yield of MUB to be 2.76%. Compared to a tax effective yield of 1.8% for the 2.4% 3 month t-bills. An improvement of 0.94%.
I suggest that you take the state taxes into account and consider only the after-tax yield of the two possible investments. Here is the computation (which still ignores some factors, such as compounding periods):
  • MUB has a federal tax-exempt yield of: 2.20%,
  • and after taking state tax into account, MUB has a take-home yield of about 2.09% (computed as 2.2% x 0.95).
  • The t-bills have a yield of 2.4%,
  • and after taking federal tax into account, the t-bills have a take-home yield of about 1.82% (computed as 2.4% x 0.76).
  • So this comparison gives MUB a 0.27% advantage over the t-bills.
As others have pointed out, MUB has higher risks, for both defaults and interest-rate changes. I don't know whether the 0.27% take-home advantage adequately compensates for those risks.
Despite the flat Treasury yield curve, the muni fund still has interest-rate risk, which is part of its premium. (The reason for this difference is that most munis are callable; if rates rise, munis will not be called and the duration of muni funds will increase.) Admiral shares of Vanguard Short-Term Tax-Exempt, with a one-year duration and thus very low interest-rate risk, yield 1.68%, so this fund yields less after tax than one-year Treasuries. Vanguard Limited-Term Tax-Exempt, with a three-year duration, yields 1.84%, the same as three-year Treasuries.

So in the 24% bracket, it looks like a close decision between munis and taxable bonds; I believe this is normal.
Wiki David Grabiner

hudson
Posts: 1676
Joined: Fri Apr 06, 2007 9:15 am

Re: Considering Muni bond ETFs for my Taxable account

Post by hudson » Sun Apr 14, 2019 12:30 pm

tiburblium wrote:
Sat Apr 13, 2019 4:59 pm
Questions:

1.) I read so much negative press on bonds, but that tends to be focused on corporate bonds and high yield corporate. I realize that the MUB muni fund has an average duration of ~6 years there will be interest rate risk, but if you have a national muni fund I am assuming the default/downgrade risk is much less significant vs corporate. Any opinions on this?

2.) Is there a national Muni fund/etf that you like more than MUB?

3.) Any reason you wouldn't suggest taking a large (80%) muni position of bond allocation in taxable in my situation?

Thanks for reading!
I like Vanguard's VWIUX better than MUB. Look at Vanguard's monthly distribution yield since Oct 2017; it hasn't been below 2.77%.
It works better for tax loss harvesting. Don't copy me unless you've done your homework. Compare the percentages of AAA/AA/A bonds held by each....safety is important to me.

Consider "doing the math". Figure the one year return on the highest 5 year CD you can find...say for $100K. Subtract taxes...state and federal if applicable. Do the same for MUB and VWIUX using whatever return figure you like; I like the distribution return. Subtract state taxes. Spreadsheet everything and compare. In January, I did the math and VWIUX won for what I needed to invest. I really like CDs. Maybe also look at Baird's BMBIX...is there a safer muni?

Question 3: I don't mind taking a large muni position...but I like to be 3:1 CDs to munis. Of course it depends on the interest rates, your federal tax bracket, and you state tax rate....but you already knew that. It also depends on how safe the investment is...you also knew that.
Last edited by hudson on Sun Apr 14, 2019 2:44 pm, edited 4 times in total.

epictetus
Posts: 530
Joined: Sat Mar 10, 2007 6:43 pm

Re: Considering Muni bond ETFs for my Taxable account

Post by epictetus » Sun Apr 14, 2019 1:54 pm

vteb is vanguard's tax-exempt muni-bond fund etf.
might be worth look at that v. MUB to see how they compare
Focus on what you can control

Topic Author
tiburblium
Posts: 4
Joined: Thu Apr 11, 2019 4:28 pm

Re: Considering Muni bond ETFs for my Taxable account

Post by tiburblium » Tue Apr 16, 2019 4:47 pm

Thanks everyone for the replies, some of the high yield muni funds mentioned look interesting, especially the short term HY muni SHYD but I'm just going to keep things simple and stick with T-Bills in my "bonds" portion of my portfolio. Cheers

UpperNwGuy
Posts: 1876
Joined: Sun Oct 08, 2017 7:16 pm

Re: Considering Muni bond ETFs for my Taxable account

Post by UpperNwGuy » Tue Apr 16, 2019 5:15 pm

tiburblium wrote:
Tue Apr 16, 2019 4:47 pm
Thanks everyone for the replies, some of the high yield muni funds mentioned look interesting, especially the short term HY muni SHYD but I'm just going to keep things simple and stick with T-Bills in my "bonds" portion of my portfolio. Cheers
Why?

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