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ETF Specialist

Consider a National Municipal Bond ETF

The municipal market has increased risks, but it still offers decent tax-equivalent yields.

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Historically, municipal bonds have been one of the quieter corners of the investment world. Sure, there was the occasional single-municipality meltdown, such as what happened to Orange County, Calif., in 1994. Still, what made these events so newsworthy was the actual rarity of these kinds of disasters. That has all changed as municipalities have been blind-sided by falling tax receipts in the wake of the housing crash. Defaults are still rare because of the stigma associated with defaulting. As more municipalities have trouble meeting their obligations, they will have to make a choice between making interest payments or paying for basic services like firefighters.

One way to reduce the risk of municipal defaults is to own a diversified national municipal bond fund like  iShares S&P National Municipal Bond (MUB). While an increase in defaults is likely, the diversification inherent in the fund will help cushion the blow. Aggregate bond indexes such as  iShares Barclays Aggregate Bond (AGG) and  Vanguard Total Bond ETF (BND) do not include municipal bonds in their holdings.

Timothy Strauts does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.