What to do with inherited Nuveen muni bonds

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Topic Author
slim
Posts: 12
Joined: Fri Jul 31, 2015 8:24 pm

What to do with inherited Nuveen muni bonds

Post by slim »

Hi all,

I could use some advice on account of inheriting some funds after a parent passed away last year. I left them as-is and transferred them to my own brokerage but am unsure whether I should keep them as-is because they are likely managed munis (and maybe that's better in this current market?).

Info about myself:

Age: 36
Status: Single
State: California
Tax Brackets: 9.3% (California); 35% (Federal)
Mortgage: 450K left @ 2.93%
Taxable: VTSAX + VTIAX
Roths/401K/HSA: FFNOX

The funds I inherited currently amount to perhaps 15% of all of my holdings and the funds in question are:
- NCAAX (NUVEEN CALIFORNIA MUNICIPAL BOND FUND-CL A)
- NCHAX (NUVEEN CALIF HIGH YIELD MUN BD CL A)
- NWQAX (NUVEEN INVESTMENTS NWQ FLEXIBLE INCOME)

All of these are in taxable account and, aside from NWQAX (which seems like one of the LifeStrategy funds), these look to be actively managed muni funds which were purchased with no-load and have ERs at ~1%.

Obviously these are high ERs and I can't believe my mom was talked into this when she purchased these because she was low income her whole life but nevertheless it is what it is. Considering all the recent talk about everyone getting out of bonds or bonds being terrible for several years to come I am unsure whether to keep them as-is because active management might make sense in this case?

I had also been thinking about inverting things so-as to keep all of my bonds in taxable and switch everything else to indexes because I kind of like having fixed-income more easily accessible in the event I ever need more cash than my emergency fund could provide.

My gut says I should just sell all of these immediately and either:
- just continue w/ my existing strategy
- replace them with vanguard equivalent muni
- just keep them as cash because bonds may be terrible until I'm at least 40

Do you guys/gals have any thoughts on what you might do in my situation? If I want to go with munis in my taxable at all would it be better to go with only California munis or would national be better (or both?). I am so confused.

Thanks in advance for any suggestions/advice you may have.
lazynovice
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Re: What to do with inherited Nuveen muni bonds

Post by lazynovice »

What type of unrealized gains do they have? If you got a step up in basis, it seems like they might even have losses?

If the gains are not significant then selling them and investing in what you want makes sense. If they have losses, even better. You do not need to pay those fees for a bond fund.
“I didn’t want my sailboat to be in the driveway when I died.” Nomadland
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retired@50
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Location: Living in the U.S.A.

Re: What to do with inherited Nuveen muni bonds

Post by retired@50 »

If you're interested in keeping CA municipal bonds, Vanguard has both an intermediate and long term fund with lower expense ratios.
VCAIX
VCITX

I used Vanguard municipal bond funds when I was working, and it looks like they would make sense for you given the high tax bracket you're in.
I've since sold them off since I'm not in a high bracket any more.

Regards,
This is one person's opinion. Nothing more.
Topic Author
slim
Posts: 12
Joined: Fri Jul 31, 2015 8:24 pm

Re: What to do with inherited Nuveen muni bonds

Post by slim »

The bonds have all taken losses which total around ~2-3K. The other income fund seems to show gains of about ~1K. So I think you're right in that there was a step up in basis. Perhaps it is indeed a good time to sell.

I've been looking at VCAIX and VCITX or even VWIUX (national, intermediate). Though I'm not entirely sure what the pros/cons could be.

I also came across an interesting suggestion (viewtopic.php?t=276121) of doing 50/50 in VMLTX/VCITX so that the average length is still intermediate.

-confused
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retired@50
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Re: What to do with inherited Nuveen muni bonds

Post by retired@50 »

slim wrote: Tue Apr 06, 2021 6:33 pm The bonds have all taken losses which total around ~2-3K. The other income fund seems to show gains of about ~1K. So I think you're right in that there was a step up in basis. Perhaps it is indeed a good time to sell.

I've been looking at VCAIX and VCITX or even VWIUX (national, intermediate). Though I'm not entirely sure what the pros/cons could be.

I also came across an interesting suggestion (viewtopic.php?t=276121) of doing 50/50 in VMLTX/VCITX so that the average length is still intermediate.

-confused
If you want to lean toward shorter term bonds, then using the limited term tax exempt fund can be helpful, but it's not strictly a CA fund, so it won't have all the same risks and tax advantages as the purely CA fund(s).

If you want to just use the intermediate CA fund, that's fine too. I realize many investors are freaked out right now about the future of interest rates and don't want to see the value of their bond fund crash.

I'd consider how much money you're really talking about... As it relates to your whole portfolio. Is this a small sum, or over 50% of your net worth... If it's a small piece of the puzzle, then I'd probably just use the CA intermediate fund and call it a day.

The final thing to consider is how much of your entire bond asset class will be in municipal bonds, or more specifically, CA muni bonds. Many investors don't want to have more than half of all bonds in muni bonds, and potentially less than half in a state-specific muni fund.

Regards,
This is one person's opinion. Nothing more.
tomsense76
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Re: What to do with inherited Nuveen muni bonds

Post by tomsense76 »

A common recommendation on the forum is to split munis 50/50 between a national limited term fund and a state specific long term fund. This approximates an intermediate muni bond fund while exempting the bulk of the dividends from state and federal income tax. Maybe this works for you?
"Anyone who claims to understand quantum theory is either lying or crazy" -- Richard Feynman
typical.investor
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Re: What to do with inherited Nuveen muni bonds

Post by typical.investor »

slim wrote: Tue Apr 06, 2021 5:07 pm Hi,


- NCAAX (NUVEEN CALIFORNIA MUNICIPAL BOND FUND-CL A)
- NCHAX (NUVEEN CALIF HIGH YIELD MUN BD CL A)
- NWQAX (NUVEEN INVESTMENTS NWQ FLEXIBLE INCOME)

All of these are in taxable account and, aside from NWQAX (which seems like one of the LifeStrategy funds), these look to be actively managed muni funds which were purchased with no-load and have ERs at ~1%.
Obviously these are high ERs and I can't believe my mom was talked into this when she purchased these because she was low income her whole life but nevertheless it is what it is. Considering all the recent talk about everyone getting out of bonds or bonds being terrible for several years to come I am unsure whether to keep them as-is because active management might make sense in this case?[/quote]

Just FYI, returns on those funds have not been bad.

Jan 2010 - Mar 2021 CAGR (life of NWQAX)
33% NCAAX
33% NCHAX
34% NWQAX
---------------
6.83%

33% VCAIX Vanguard CA Interm-Term Tax-Exempt Inv 33.00%
33% VCITX Vanguard CA Long-Term Tax-Exempt Inv 33.00%
34% VWENX Vanguard Wellington Admiral
----------------
6.50%

Note: NWQAX and VWENX both allocate to stocks as well

slim wrote: Tue Apr 06, 2021 5:07 pm My gut says I should just sell all of these immediately and either:
- just continue w/ my existing strategy
- replace them with vanguard equivalent muni
- just keep them as cash because bonds may be terrible until I'm at least 40
Either of the first two seem fine. The NUVEEN funds outperformed with more volatility (despite the Vanguard allocation having more stocks) so they must have more duration and/or credit risk.

For the third one, please understand how bonds work. Rate hikes will hurt NAV until the bonds recover which they will at their duration mark. Afterwards, bond holders who continue to hold will start to benefit from the rate hike.

Personally, I want to keep my fixed income above inflation so take on a little duration and credit risk knowing I am unlikely to sell anytime soon.

For your stated goal of an emergency fund, be aware that munis don't always do well in a crash (thought they recovered nicely and too bad for those who sold out in a panic to buy at the time were expensive treasuries). I like the long/short duration barbell as well which gives you a fund to sell if you need some money after a rate hike before funds recovered. I also like long term treasuries which will be painful to hold through rate hikes, but which are tremendous to rebalance from in an economic downturn. Those are state tax free.

But look around and if you have a good cash savings rate, or stable value fund in one of your accounts, they are good options too.

I don't own a home and not in CA but at current SEC yields on bond funds, does the 2.93% mortgage make sense? Seems like a nice rate in any case...
123
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Re: What to do with inherited Nuveen muni bonds

Post by 123 »

If they were mine I would sell all three Nuveen funds now. Because they are inherited any gain or loss is long-term. From this point I think there is a higher likelihood that the share price will likely decline due to rising interest rates than the reverse. The potential decline in share price due to interest rate trends and the high expense ratios would be enough to make me want to sell. If there is a sentimental issue hold onto $1,000 worth of the one with the lowest expense ratio and sell the rest.
The closest helping hand is at the end of your own arm.
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dratkinson
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Re: What to do with inherited Nuveen muni bonds

Post by dratkinson »

Your tax brackets suggest munis are appropriate.

When I was researching single-state muni funds, recall reading Nuveen prospectus and finding lots to dislike: AMT, leverage,... forget all what else---lots of stuff I recalled reading that we should avoid.

Student exercise.
--Read prospectus for all your Nuveen funds. Pay attention to the "stuff to avoid": AMT, leverage,.... Recall last tax code change added pre-refunded munis to list of things to avoid.
--Read prospectus for Vanguard CA muni candidates.

Believe you will decide Vanguard to have the better options.

And since you have current Nuveen losses, now would be a good time to sell all to take advantage of the TLH, and buy what you want.
See: https://www.bogleheads.org/wiki/Tax_loss_harvesting
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.
Topic Author
slim
Posts: 12
Joined: Fri Jul 31, 2015 8:24 pm

Re: What to do with inherited Nuveen muni bonds

Post by slim »

tomsense76 wrote: Tue Apr 06, 2021 7:19 pm A common recommendation on the forum is to split munis 50/50 between a national limited term fund and a state specific long term fund. This approximates an intermediate muni bond fund while exempting the bulk of the dividends from state and federal income tax. Maybe this works for you?

Thanks for the feedback everyone.

I think I will go ahead and sell everything this week and just go w/ the 50/50 spread between CA long-term and national limited term and keep it that way going forward. :sharebeer :sharebeer
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