High Yield Municipal Bonds ETF: Benefits and Risks

High Yield Municipal Bonds

High yield municipal bonds electronically traded funds offer both benefits and risks for any investor. Many investors see investing in municipal bonds as a very low risk option, but this does not make these securities risk free. When the goal is a high yield and the investment is into an electronically traded mutual fund the risks can increase though, and these investments may not be as safe and conservative because of these factors. Any time the yield of an investment increases the risks associated are also increased. High yield municipal bonds, and the ETFs that invest in these bonds, are not right for everyone, but they can be ideal for some investors after careful consideration.

One of the benefits that municipal bond ETFs offer is that usually only the best municipal bonds are included in the portfolio. The fund manager determines which bonds are right for the fund goals, and each investment possibility is carefully researched and evaluated. High yield municipal bonds offer a higher rate of return in most cases, because of the increased risks. With a mutual fund all of the money from investors is combined, so larger purchases and bigger discounts may be possible. This also helps lower the fees involved in many cases. Zero coupon municipal bonds do not provide interest payments, instead the fund purchases the bonds at a cost far less than the maturity value, and the interest and principal is paid at the end of the term to make up the face value of the bond.

High yield municipal bonds carry increased risks, and in a tough economy some local government bonds may end up in default. This is rare, but has happened before. Municipal bond interest rates can vary, and in some cases this can mean a lower return. There are fees involved when you invest in an ETF, and in some cases the tax advantages of owning municipal bonds may be substantially lowered when a mutual fund is used instead of individual bond investments.