Thomas Boccellari: Taxable-bond investors interested in exposure to only the highest-quality municipal bonds may consider SPDR Nuveen Barclays Municipal Bond ETF (TFI). The fund tracks a broad index of municipal bonds with an average credit rating of AA- or better. Municipal bonds are bonds issued by state and local governments to fund a variety of projects, such as education, utilities, and transportation. Because municipal-bond interest is exempt from federal taxes, municipal-bond funds are most appropriate for investors in high tax brackets and best used in a taxable accounts.
At first glance, the fund's yield may appear low relative to other fixed-income investments with similar risk. However, when you examine the fund's tax-equivalent yield--or the yield that a taxable bond would need to offer to equal the fund's tax-exempt yield for investors in the top tax bracket--it's actually higher than comparable-risk, taxable-bond funds.
Additionally, the fund's more stringent credit-rating screen ensures that only the highest-quality municipal bonds are included. This can greatly reduce the chance of default within the portfolio and can reduce the fund's volatility.
The fund's 23-basis-point expense ratio is not the cheapest in its category; however, it is below its category average. Further, it is currently the only municipal-bond fund that includes an AA- credit rating or better credit-quality screen.
This fund is best used by risk-averse investors looking for a portfolio of high-quality municipal bonds and tax relief.