Top 5 Best National Municipal Bond ETF Fund: Tax Exempt, Tax Free Muni 2011

Bond or fixed income should be part of investor asset class diversification. One of the bond sections is municipal bond. Investing in municipal bond can be done various different ways. This article will provide Top 5 Best National Tax Free Municipal Bond ETF (i.e. non taxable). So what are the ways to invest in municipal bonds?

1. Investor can select individual bond individually by looking at the bond information during the bond offering or through the secondary market. Though this method can be cumbersome for people and it does involve more risk since individual bond can default and the bond value will fluctuate from time to time etc. When the bond is default, your bond value will decrease or some may even lose all its value. If you never trade bond before, please consult with financial advisor or reading more books or articles.
2. Investor can invest in muni bond mutual fund. The municipal bond mutual fund will provide more diversification with various bonds in its asset. If one of the bonds is default, the fund will still retain the value. The mutual fund manager and analyst may be able to buy or sell lower grade bonds etc. This will provide additional protection for investor, though this certainly can become a double sword situation. If the manager does a lot of trading or place a bad investment strategy, the fund will have capital gain distribution or loss more value due to bad strategy. Note: Some of these ETFs have a low trading volume, this can result in high gap of bid-ask spread for the ETFs. Please use limit order when you buy these ETFs (exchange traded funds).
3. The other way is investing in Muni Bond ETF. Municipal Bond ETF is very liquid and more tax efficient than its mutual fund counterpart. Similar to mutual fund, Municipal Bond ETF is more diverse than individual muni bond. Most of the Muni Bond ETF is following its index and is containing a bunch of bonds holding (>30 bonds holding). Active trader also likes its liquidity for trading purpose. I’ll focus on this later.
4. Finally, investor as well as trader can trade as well as invest in Municipal Bond Closed End Fund (CEF). The Muni Bond CEF does trade similarly to ETF (Exchange Traded Fund).

If you are interested in Municipal Bond Fund, Please check my other article on CEF and ETF:

• Top 10 Best Tax Free Municipal Bond Mutual Funds
• Top 10 National Muni Bond Closed End Funds (CEF)

What are my criteria for selecting this Top 5 Tax Exempt National Muni Bond ETF? I always like the big asset ETF and high Morningstar rating ETF (> 3 stars). Big asset ETF means small investor as well as institutional investor will invest in this ETF without hesitation. Usually big asset also means it is a solid ETF and will continue to grow in future. High rating in Morningstar rating means the ETF has performed better than its index or competitor during the bull market or bear market. The following is the Top 5 Best Tax Exempt National Municipal Bond ETF:

1. iShares S&P National AMT-Free Muni Bond
2. SPDR Nuveen Barclays Capital Short Term Muni Bond
3. SPDR Nuveen Barclays Capital Muni Bond
4. PowerShares Insured National Muni Bond
5. PowerShares VRDO Tax-Free Weekly

Compare to other bond ETFs, this iShares S&P National AMT-Free Muni Bond is one of the largest national municipal bond ETF with 2.2 Billion in total asset. IShares fund family which is part of BlackRock is well known to everyone. It is one of the top asset management in world especially ETF as well as other products such as mutual fund, closed end fund (CEF), etc. This iShares S&P National AMT-Free Muni Bond ETF objective is to seek results that correspond of the S&P National AMT-Free Municipal Bond Index. This ETF fund will invest most (80%-90%) of its asset in the securities of its index and in securities that provide substantially similar exposure to the securities in its underlying index. It may invest some (<20%) of its asset in certain futures, options and swap contracts, cash and cash equivalents, as well as in municipal bonds not in its index.

The top 4 sectors are Transportation, Utility, Various Purpose, and Tax-Revenue. There is no top states municipals breakdown currently. There are more than 200 bonds in its holding currently. The total expense is 0.25% per year which is low compare to muni mutual funds as well as muni CEFs. The average credit rating of the bonds in this ETF is A. The average effective duration is 7.32 years.

As part of State Street Global Advisor (SSGA) ETF, the SPDR^® Nuveen Barclays Capital Short Term Municipal Bond ETF is the second largest Muni bond ETF with 1.3 Billion total assets. SPDR is well known with its largest and oldest ETF which is SPDR S&P 500 ETF (ticker: SPY). The ETF seeks to provide investment results that correspond generally to the price and yield performance of the Barclays Capital Managed Money Municipal Short Term Index, before fees and expenses. The ETF also has an approach to design to provide portfolios with low portfolio turnover, accurate tracking, and lower costs.

The top 5 states municipals are New York, California, Texas, Connecticut and Florida. There are 332 bonds in its holding currently. The total expense is 0.20% per year which is low compare to muni mutual funds as well as muni CEFs. The average credit rating of the bonds in this ETF is AA. The average effective duration is 2.93 years.

Similar to SPDR Nuveen Barclays Capital Short Term Muni Bond, SPDR Nuveen Barclays Capital Muni Bond is also part of State Street Global Advisor (SSGA) ETF. The ETF seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the Barclays Capital Municipal Managed Money Index (index ticker: LMMITR). The ETF also has an approach to design to provide portfolios with low portfolio turnover, accurate tracking, and lower costs.

This bond fund is also classified as long term muni bond ETF. The top 5 states municipals are New York, California, Texas, Washington and Florida. There are 314 bonds in its holding currently. The total expense is 0.23% per year which is low compare to muni mutual funds as well as muni CEFs. The average credit rating of the bonds in this ETF is AA. The average effective duration is 9.4 years.

PowerShares Insured National Muni Bond is based on The BofA Merrill Lynch National Insured Long-Term Core plus Municipal Securities Index (Index). Powershares ETF is part of Invesco investment line up. Invesco is considered a market leader in ETF investing. This fund will normally invest at least 80% of its total assets in securities that comprise the Index and generally expect to invest at least 90% of its total assets. The Index is designed to track the performance of U.S. dollar-denominated, investment-grade, insured, tax-exempt debt publicly issued by U.S. municipalities in the U.S. domestic market. The Index is adjusted monthly and its constituents are capitalization-weighted based on their current amount outstanding.

This bond fund is also classified as long term muni bond ETF. There is no top states municipals breakdown currently. There are 188 bonds in its holding currently. The total expense is 0.35% per year which is low compare to muni mutual funds as well as muni CEFs. The average credit rating of the bonds in this ETF is AA. The average effective duration is 12.93 years.

Similar to PowerShares Insured National Muni Bond, the PowerShares VRDO Tax-Free Weekly is part of Invesco Investment ETF Line up. The fund portfolio is will track the performance of its index, the Bloomberg US Municipal AMT-Free Weekly VRDO Index. The fund has recently changed its index from the Thomson Municipal Market Data VRDO Index to the Bloomberg US Municipal AMT-Free Weekly VRDO Index on August 2010. The fund will normally invest most of its asset (>80%, up to 90%) in securities that comprise the Index. The Index is comprised of municipal securities issued in the primary market as Variable Rate Demand Obligations (VRDOs) whose interest rates are reset weekly.

VRDOs are floating-rate bonds that provide investors with tax-exempt income (i.e. Tax Free income). VRDOs are generally purchased at par. When they are put back to an investment dealer, the investor generally receives par plus accrued interest.

This bond fund is also classified as short term muni bond ETF. There is no top states municipals breakdown at this point. There are 80 bonds in its holding currently. The total expense is 0.25% per year which is low compare to muni mutual funds as well as muni CEFs. The average credit rating of the bonds in this ETF is AA. The average effective duration is 7 days.

Like stock trading, you will need a brokerage to buy ETFs such as:

• Fidelity – You can trade stock as well as CEF for $7.95 per trade. It also offers one stop shop for mutual fund or ETF as well as cash management banking.
• Schwab - You can trade CEF for $8.95 per trade. It also offers one stop shop for mutual fund or ETF as well as cash management banking.
• OptionsHouse - You can trade stock, CEF, ETF for $2.95 per trade. It also offers one stop shop for mutual fund or ETF as well as cash management banking.
• Zecco – If you have $25,000 account balance, investor can get 10 free trades per month.

Disclosure: I have no affiliation with any of these ETFs. I also have no position in any of these funds currently. Please do your own research for additional details. Please trade and invest responsibly. Past Performance is No Guarantee of Future Results.