Now's a Good Time to Consider Muni CEFs

The Morningstar Minute is our quick take on investments, the market, economic indicators, and more. Join us every day for fresh insights from our analyst team.

Tim Strauts: Closed-end municipal-bond funds could be an opportunity for investors willing to deal with above-average volatility. Most investors know that closed-end funds trade at premiums and discounts, and there can be a buying opportunity when a fund trades at a substantial discount. But just looking at discounts alone is not the way to buy closed-end funds. You need to look at the discount in relation to where it's average discount has been over time.

The way we measure this is use a statistic called Z-score. A Z-score of negative 1 is a buying opportunity, and positive 1 is usually a selling opportunity. And currently if you look at the municipal-bond space the average Z-score of the municipal-bond category is negative 1.2 as of April 15.

When looking at the chart historically, every period that the Z-score went below negative 1 has been a good entry point into municipal bonds. But it doesn’t mean that Z-Score can't go lower and further because in 2008 during the market panic it went as low as negative 5 for one day, but then quickly rebounded.

For an investor willing to deal with higher volatility, closed-end municipal-bond funds could be a good opportunity right now.