Municipal bonds might not be the first thing that comes to mind when you think of a sexy investment. They don’t typically command news headlines like the stock market or bitcoin.
That doesn’t mean investors should disregard short-term munis. In fact, munis play a very important role in any serious portfolio. Below are four big reasons why you should get excited about muni bonds.
1. Tax-free income!
As you might already know, muni bonds are debt instruments used primarily to finance state and local infrastructure projects. When policymakers introduced them in 1913, they wanted to make sure investors were amply incentivized to participate. To that end, the decision was made to reward muni investors with tax-free income at the federal level and, in many cases, at the state and local levels.
For residents of high-tax states such as California, New York, Oregon and others, this feature should be especially appealing.
Even if you don’t live in one of those states, munis can help you preserve—and therefore compound—more of what you earn. Who doesn’t like getting something for nothing?
2. New tax law has actually boosted demand for munis.
But wait! Doesn’t the recently signed tax overhaul tarnish munis’ allure? Not so fast.
The new law, which went into effect January 1, caps the state and local deductions taxpayers can take at $10,000. That makes municipal bonds even more valuable as a portfolio diversifier, particularly for households with hefty tax bills.
Healthy inflows so far this year suggest demand for munis remains strong. For the week ended February 21, muni bond funds, including mutual funds and ETFs, took in $347 million of net new money, raising overall net inflows for 2018 to $6.8 billion.
It’s still early in the year, but this puts the muni market on track for the fifth straight year of positive flows since 2013. That year, outflows totaled a record $64.2 billion on rising Treasury yields and the looming bankruptcy proceedings of Detroit and Puerto Rico.