However, that’s not to say that a local government can’t default, so no muni bond is without risk, it’s just less likely, so there’s less risk. And I talk a little more about risk in my closing thoughts at the end of this article. However, one caveat to the tax advantage of muni bonds being “tax-free” is the AMT – alternative minimum tax amount. In some cases, the dividend stream from muni bonds is taxable if it falls under the AMT. To combat that issue, there are municipal bond ETFs like MUNI – the PIMCO Intermediate Municipal Bond Strategy Fund. This municipal bond ETF’s strategy is to include securities that are not subject to the federal AMT. Speaking of the dividend stream, that is another benefit to muni and other bond ETFs. If your portfolio is wanting some recurring revenue, a bond ETF may be the solution. So another reason to consider them for your portfolio. We touched on the AMT tax issue above, but again, that can be a detriment for some municipal bond ETFs. Keep in mind that while these funds may be attractive, they do have their risks. As do all investments, so make sure you research each new fund or note thoroughly before making any trades. Watch how the funds react to different market conditions. Understand what is in each fund and, if you have any questions or concerns, be sure to consult a financial professional such as a broker or your financial advisor or planner.
