Introduction to the Municipal Bond Asset Class
TOM BUTCHER: Jim, thank you very much for joining me today. Why should investors consider a portfolio allocation to the municipal bond asset class?
JIM COLBY: Modern portfolio theory has it that portfolios should be diversified and that means investments in a variety of different asset classes. Municipal bonds have shown to be a valuable part of a diversified asset allocation. Why? Historically they have not correlated, i.e., matched the performance of other asset classes, which means the valuations of municipal bonds may potentially to rise as the value of other equity positions might fall, offering the potential for a balanced portfolio approach to your investment goals. Another important feature is the value of the tax exempt coupon. The tax benefit provided by municipal bonds is known, but perhaps not clearly understood in terms of the ultimate comparison and value that munis can bring to an asset allocation model.
BUTCHER: What investment option should investors consider?
COLBY: There are a variety of options available to municipal investors. For many years individuals have purchased individual bonds to build a laddered portfolio—one that is done in such a way that year after year investments mature and roll over with reinvestment occurring in the same context—but there are mutual funds, closed-end funds, and as of about seven years ago we have municipal bond ETFs, which are another vehicle that investors can use.
BUTCHER: What stands out about Van Eck's suite of municipal bond ETFs?
COLBY: I like to think of the suite of municipal ETFs at Van Eck as “munis made easy.” I say that because these are diversified portfolios. These are portfolios that are segmented across the spectrum of both credit and maturity, which means, in terms of assessing what risk profile an investor chooses to assume. They can choose from credit as well as where on the maturity spectrum.
BUTCHER: Jim, thank you very much for that very interesting explanation of the characteristics and attractions of the municipal bond asset class.
COLBY: My pleasure.
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Diversification neither assures profit nor protects against loss.
Municipal bonds are subject to risks related to litigation, legislation, political changes, local business or economic conditions, conditions in underlying sectors, bankruptcy or other changes in the financial condition of the issuer, and/or the discontinuance of the taxation supporting the project or assets or the inability to collect revenues for the project or from the assets. Bonds and bond funds will decrease in value as interest rates rise. The Fund may also be subject to credit risk, interest rate risk, call risk, lease obligations, tax risk, and risks associated with non-investment grade securities. The market for municipal bonds may be less liquid than for taxable bonds. There is no guarantee that the Fund's income will be exempt from federal or state income taxes. Federal or state changes in income or alternative minimum tax rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. Capital gains, if any, are subject to capital gains tax. For a more complete description of these and other risks, please refer to each Fund's prospectus.
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