Retirement & Financial Planning Report

If you owed tax on investment income on your 2008 tax return, you might prefer tax-free income from municipal bonds. Municipal bond exchange-traded funds (ETFs) offer several advantages:

* High yields. Ordinarily, municipal bonds trade at lower yields than Treasury bonds. Today, muni yields are higher. For example, iShares S&P National Municipal Bond ETF currently yields around 3.5%, tax-exempt.

* Low costs. Annual fees are usually in the 0.20% to 0.40% range, compared to 0.50%-0.80% for municipal bond mutual funds.

* Transparency. You know what’s in your ETF. Bond mutual funds, on the other hand, only have to report what they held in the prior quarter.

* Liquidity. While mutual funds can only be sold at the prior day’s closing price, muni ETFs can be sold at the current price any time during trading hours.

 

As is the case with any ETF, you’ll have to pay a broker’s commission to buy or sell shares. Therefore, you should buy through a discount broker to hold down your costs.