Wealthy investors are shoveling more money into publicly traded municipal bond funds as they seek protection from expected higher tax rates.
Municipal bond ETFs have seen net inflows of $ 13.8 billion this year. The current price is expected to exceed the $ 14.5 billion raised by Muni-Bond ETFs for the full year 2020.
The U.S. Senate recently approved a $ 1 trillion infrastructure spending package. That’s on top of the $ 1.9 trillion Covid-19 relief bill passed earlier this year, plus $ 2.2 trillion in overspending from the CARES bill in 2020. The surge in government spending has left many wealthy Households and financial advisors alerted as they prepare for higher income tax rates.
Municipal bond income is exempt from federal taxes and state income taxes as long as the bonds purchased are in the taxpayer’s home state. In certain cases, government bond income may be subject to state taxes.
There are 65 US-listed municipal bond ETFs with total assets of $ 78.5 billion, according to ETFAction.com. The Denver-based company has seen a surge in demand for Muni-Bond ETFs.
ETFs, which own municipal bonds with higher yields and lower credit ratings, are among the biggest beneficiaries of rising investor demand. More than $ 1.25 billion has already flowed into high-yield Muni-Bond ETFs this year, more than ten times the assets of $ 111 million raised in 2020.
VanEck Vectors High Yield Muni ETF (HYD), valued at $ 3.9 billion, is one of the funds in the high yield category that has seen a surge in asset flows. HYD has a 30-day SEC return of 2.18%, which translates into a taxable equivalent return of 3.46% for investors in the highest tax bracket of 37%. The fund pays monthly income payments and calculates 0.35% annually.
Muni-Bond ETFs, which are exempt from the Federal Alternative Minimum Tax (AMT), have become another popular destination for investors.
With total assets of US $ 8.7 billion, ETFs linked to municipal bonds with AMT-free income represent the largest segment within the entire ETF category for municipal bonds. Within this group, Invesco holds the Invesco National AMT-Free Municipal Bond ETF (PZA) at least 80% of its assets in AMT-exempt Muni-Bonds.
The AMT prohibits certain deductions that are permitted under the ordinary income tax law. After calculating taxes based on both ordinary income and AMT rates, taxpayers must pay the higher rate. The 2017 tax law change under the Tax Cuts and Jobs Act increased exit thresholds, meaning fewer taxpayers are subject to the AMT.
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