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One of the ways that states, cities, and counties fund the growth of their communities is through the issuing of municipal bonds. These bonds are stable investments that offer steady yields in return for your investment. They often find favor among fixed-income investors because one of the main attractions of municipal bonds is that the interest income is usually exempt from federal income tax. Additionally, the interest may be exempt from state and local taxes if you reside in the state issuing the bond.
Municipal bonds are becoming more attractive right now for a few key reasons. The first is that while interest rate cuts could make yields fall, they could also increase demand for municipal bonds. The second is that the tax advantages for municipal bonds could become more attractive if current tax breaks are allowed to expire next year. A report from Nuveen forecasts strong days ahead for municipal bonds as investors seek steady income with low default risk.
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For investors interested in investing in municipal bonds through ETFs, Goldman Sachs has launched four municipal bonds ETFs, each with a distinct strategy. “The changing municipal bond landscape offers nimble investors and a potential opportunity to take advantage of attractive risk/reward trade-offs, however, sector and credit selectivity will continue to be vital,” said Scott Diamond, Co-Head of Municipal Fixed Income at Goldman Sachs Asset Management.
The Goldman Sachs Ultra Short Municipal Income ETF (GUMI) has 86 holdings and an expense ratio of 0.16%. Its goal is to provide income with low volatility by investing in shorter-dated maturities with fixed-rate and floating-rate structures. Its top two sectors are school district GO bonds and city/county GO bonds. GO bonds are general obligation bonds, which means they are backed by the full faith and credit of the issuing municipality, which pledges to use its taxing power to repay the debt. This ETF is exempt from federal income tax.
Similarly, the Goldman Sachs Municipal Income ETF (GMUB) seeks to provide a high level of current income with a diversified approach to core municipal investing focused on investment-grade municipal bonds. Its approach differs slightly in that it may own up to 15% of net assets in noninvestment grade municipal bonds with a general duration range between three and six years. It currently has 43 holdings and has an expense ratio of 0.18%. Its top sector is airport bonds, followed by state and school district GO bonds. It is exempt from federal income tax.
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Two municipal bond ETFs are centered in California and New York for those looking for a state-specific approach.
The Goldman Sachs Dynamic California Municipal Income ETF (GCAL) has duration flexibility between two and eight years and may hold up to 30% of net assets in non-investment-grade municipal bonds. It has 37 holdings and an expense ratio of 0.35%. Its top sector is hospital bonds, but the ETF also includes state GO bonds, corporate bonds, airports, and universities. This ETF is exempt from California personal income tax and federal income tax.
The Goldman Sachs Dynamic New York Municipal Income ETF (GMNY) has 43 holdings and an expense ratio of 0.35%. Like the California municipal bond ETF, duration flexibility between two and eight years may allow it to hold up to 30% of net assets in noninvestment-grade municipal bonds. Its top three sectors currently are special tax, university, and transportation.
Because these ETFs are new, they don’t have a track record to point to, and potential investors are advised to read the prospectus for each fund carefully. There is also no guarantee that the attractive tax breaks associated with municipal bonds and municipal bond ETFs will continue. Vikram Rai, the head municipal bond specialist at Wells Fargo & Co., told Bloomberg that there is always a possibility that new tax proposals could come along to limit the tax advantages of these instruments. Should that happen, municipal bonds will become less attractive, although this will likely not impact existing municipal bonds. For now, these remain a good option for investors seeking fixed income with limited risk of default.
Munis Aren’t The Only Game In Town
If municipal bonds aren’t right for you, there are other ways to earn strong yields in this high-interest-rate environment. Private market real estate investments are giving retail investors the opportunity to capitalize on these high-yield opportunities, and Benzinga has identified some of the most attractive options for you to consider.
For instance, the Ascent Income Fund from EquityMultiple targets stable income from senior commercial real estate debt positions and has a historical distribution yield of 12.1% backed by real assets. With payment priority and flexible liquidity options, the Ascent Income Fund is a cornerstone investment vehicle for income-focused investors. First-time investors with EquityMultiple can now invest in the Ascent Income Fund with a reduced minimum of just $5,000. Benzinga Readers: Earn a 1% return boost on your first EquityMultiple investment when you sign up here (accredited investors only).
Don’t miss out on this opportunity to take advantage of high-yield investments while rates are high. Check out Benzinga’s favorite high-yield offerings.
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This article Municipal Bonds On The Rise, Goldman Sachs Offers Four New Muni Bond ETFs originally appeared on Benzinga.com