MUB: For These In Excessive Tax Brackets, Think about This Earlier than Recession

iShares Nationwide Muni Bond ETF (NYSEARCA:MUB) presents broad municipal bond market publicity within the US. With AUM of about $32.5B, MUB gives traders with a low-risk and low-volatility supply of earnings that’s free from federal earnings taxes. MUB at the moment has a 30-day SEC yield of about 3.5%, nevertheless, tax-equivalent SEC yield, it has a really spectacular yield of just about 6%. As a result of MUB presents a high-yield, low-risk funding throughout financial uncertainty, I fee MUB a Purchase.

Holdings

MUB holds a whopping 5492 US muni bonds. MUB’s high 10 holdings make up solely about 2.5% of its AUM.

MUB holds munis in all however 5 states, with California, Florida, and Texas being the highest 3 issuers, making up about 48% of the ETF.

Though this may occasionally look like a focus challenge, contemplating that MUB principally holds solely top-tier rated bonds, there should not be a lot fear.

Nearly all of MUB’s holdings are in A-rated bonds or higher. The ultimate be aware on MUB holdings is the maturities of the munis MUB holds.

MUB holds mixture of maturities. Its largest holding is in 15-20 12 months munis, adopted by 20-25 12 months munis. These two long-term bonds are then adopted by 2 short-term bonds, 0-3 years and 3-6 years. This offers the ETF good range amongst maturity time frames.

Yield

Munis are identified for offering a tax-exempt and secure yield to traders. MUB at the moment has a 30-day SEC yield of about 3.5%. Whereas this may occasionally not sound spectacular, remember that these yields are tax-exempt. The tax-equivalent SEC yield is a software for traders to check tax-exempt yields to taxable yields. MUBS tax-equivalent SEC yield is 5.9%. This yield is greater than lots of the highest-paying bond ETFs. The desk under reveals the 30-day SEC yield of various bond ETFs and the tax-equivalent SEC yield for MUB, so we will examine them.

ETF Yield SGOV (iShares® 0-3 Month Treasury Bond ETF)

5.10%

BIL (SPDR® Bloomberg 1-3 Month T-Invoice ETF) 4.86%

VTC (Vanguard Complete Company Bond ETF ETF Shares)

3.37%

BND (Vanguard Complete Bond Market Index Fund ETF Shares)

4.30%

MUB (iShares Nationwide Muni Bond ETF)

5.94%

(tax-equivalent yield)

Click on to enlarge

MUB has the next yield than all of those different ETFs. As we doubtless enter a recession within the subsequent 12 or so months, this excessive yield can convey consolation to traders. Receiving excessive common coupons can add stability to a portfolio in the course of the coming recession. Not solely does MUB supply this, but it surely additionally presents low volatility.

MUB has a tax-equivalent yield of about 5.9%. Nevertheless, remember that not everyone seems to be taxed the identical.

Because the picture above reveals, the very best Federal and State tax charges are assumed. Which means that relying in your earnings and the state you reside in, your tax-equivalent yield could also be decrease than 5.9%. If an investor is in a decrease tax bracket and in a state with low or no earnings tax, the tax-equivalent yield could fall under these of its friends, doubtlessly making them a greater possibility. There are various on-line calculators to seek out the tax-equivalent yield in your particular person circumstance. Plug your quantity into the desk that was proven within the “Yield” part to see if MUB stays a greater possibility than its friends.

Volatility

Munis should not sometimes risky as a result of they are not very dangerous. Their default danger is decrease than that of investment-grade company bonds.

Because the chart above illustrates, MUB is much less risky than VTC. It additionally has the next tax-equivalent yield. I see no motive so as to add extra volatility to your portfolio in return for a decrease yield. However what about ETFs like SGOV and BIL which have virtually zero danger and solely a barely decrease yield?

MUB vs SGOV and BIL

SGOV and BIL are each ultra-short US treasuries ETFs that pay about 5.1% and 4.9%, respectively. Whereas MUB’s tax-equivalent yield is kind of a bit greater than these two ETFs, they’ve little or no danger. Whereas I feel the bigger tax-equivalent yield from MUB alone makes MUB the higher possibility, there may be another excuse to favor MUB over SGOV and BIL, and that’s capital appreciation. As a result of MUB has longer maturity occasions and is, subsequently, extra delicate to adjustments in rates of interest, it has extra capital appreciation potential than SGOV and BIL.

As of proper now, we’re led to imagine by Fed Chairman Powell that there might be two extra fee hikes in 2023. We have been additionally informed that it is going to be a few years earlier than any fee cuts. However as soon as these cuts begin taking place, yields will go down, inflicting bond costs to go up. For brief-term treasuries, the capital appreciation from that is going to be minimal. Nevertheless, as rates of interest fall, I feel MUB’s worth will go up.

I need to make the purpose that SGOV and MUB should not mutually unique holdings, particularly contemplating I’ve given each a Purchase score. All of it will depend on particular person danger tolerance in addition to how typically an investor desires to make adjustments to their portfolio. Ideally, an investor would personal SGOV or BIL now and swap to MUB simply earlier than charges begin to fall with a purpose to revenue off of capital appreciation, however because the saying goes, “Time available in the market all the time beats timing the market.”

Dangers

Though munis are thought-about a secure funding, defaults do nonetheless occur, particularly when the economic system is struggling. In January 2023, first fee defaults doubled 12 months over 12 months. If we enter a recession, as I predict we’ll, it is doubtless extra munis will default. Nevertheless, contemplating that over 80% of MUB is in AAA and AA bonds, I feel MUB avoids most of this danger. The ten-year common default fee for AAA-rated munis is 0.00%, whereas the AA-rated default fee is barely greater, at 0.02%.

One other potential danger MUB is uncovered to is rate of interest danger. If inflation does not cool as quick because the Fed expects it to, charges could also be raised greater than anticipated. This is able to damage MUB. Simply as MUB will respect if charges are lower, if charges rise greater than anticipated, MUB will depreciate.

Conclusion

MUB presents publicity to over 5000 US muni bonds. As we method the approaching recession, I feel the excessive yield and low volatility that MUB presents are very engaging. Whereas there are different ETFs that provide almost as excessive of tax-equivalent yields and have even decrease danger than MUB, MUB presents capital appreciation alternatives when charges start to fall. I fee MUB a Purchase.