- Public Works allows investors access to the municipal bond market
- Municipal bond interest payments are generally free from income tax obligations
- Investments like Public Works can help you diversify your portfolio
If you take your city’s public transportation system or drive across a bridge to get to work every day, there’s a good chance that they were paid for, at least in part, by municipal bonds.
A quick refresher, a bond is a loan and you, as the buyer, are the lender. In the case of municipal bonds, you’re loaning a local government, or municipality, your money.
These bonds, or “munis,” have been around for centuries. New York City sold the first official municipal bond sold in the U.S. in 1812, to fund the construction of the Erie Canal. Munis also helped pay for the Golden Gate Bridge, Atlanta’s public transit system, Denver International Airport, and Millennium Park, the outdoor green space, in Chicago.
The world around you has been built by bonds. And Stash lets you invest in municipal bonds, with the Public Works (ticker: MUB) exchange-traded fund.
What’s in the fund?
Public Works is what Stash calls the iShares National Muni Bond ETF, which tracks the S&P National AMT-Free Municipal Bond Index.
The fund gives investors exposure to the U.S. investment-grade tax-exempt municipal bond market. By purchasing shares of the fund, you’re buying debt issued by state and local governments, as well as agencies from across the country.
As the interest earned by many munis isn’t subject to federal taxes, the fund also pays out tax-exempt interest, according to the fund’s prospectus. That could make it of particular interest to tax-conscious investors.
Public Works holds state and local government bonds from 44 states and the District of Columbia. The fund’s largest holdings are concentrated in two states: California (23.37%) and New York (21.03%). Debt from municipalities in Texas, Massachusetts, and New Jersey also make up more than 4% each.
The fund launched in 2007 and is managed by BlackRock.
Year-to-date, as of April 2018, the fund is down -1.94%, according to Morningstar.
As the fund is made up of municipal bonds, its performance isn’t likely to be as volatile as a stock-based fund. Therefore, its track record has been somewhat measured over the past decade.
In 2017, the fund’s return was 4.72%, for example. The year before, in 2016, it was 0.16%. The fund’s best year was 2011 in recent years, as it finished up 12.98%.
Are there similar funds?
State and city governments almost always need money, which means there is typically an opportunity to buy municipal debt. For that reason, there are other similar funds out there for investors looking to buy bonds.
One of those funds is the Vanguard Tax-Exempt Bond ETF (ticker: VTEB), which tracks the S&P National AMT-Free Municipal Bond Index, just like Public Works. Likewise, VTEB’s performance has closely aligned with Public Works’, though VTEB’s has had a shorter history or returns, having launched in 2015.
Year-to-date, as of April 2018, VTEB is down -1.71%, according to Morningstar. In 2017, the fund finished up 4.86% –which closely matches the performance of Public Works.
Risks and considerations
Investors typically buy bonds in order to smooth out their portfolio’s risk profile, particularly if they’re over-invested in stocks. While municipal bonds are generally safer than stocks and corporate bonds, they aren’t risk-free.
Like other kinds of bonds, municipal bonds are susceptible to credit risk, or the risk that the issuer could default and not pay either on time or in full when the bonds reach maturity.
As for the tax benefit, munis are often triple tax-exempt–meaning they’re not taxed by the federal, state, or local government. The fund’s prospectus does, however, include this caveat: “There is no guarantee that the Fund’s income will be exempt from U.S. federal income taxes, the federal AMT or the federal Medicare contribution tax of 3.8% on ‘net investment income.’”
While the fund seeks out bonds that don’t accrue taxable interest, there is no guarantee all of the bonds it chooses will always be tax-exempt.
Finally, the fund’s expense ratio is 0.25%, which is in line with the ETF average, according to industry data.