Would this also apply to short term bond funds/ETFs as well as ultra short term bond funds/ETFs? Also, what does everyone think of the argument in favor of using these to diversify a taxable account fixed income portfolio containing only Treasury bills, notes, and/or bonds?At what tax rate do Munis make sense?Munis and treasuries are two different animals.
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Treasuries, on the other hand, are considered to have no credit risk.I'd be really curious to hear everyone's thoughts on the following:I agree you need to compare like to like. The problem is that with total bond, munis (AAA/AA) and treasuries are difficult to compare. Clearly, treasuries are safer.
Only for the highest tax bracket, if you're comfortable with the additional risk. That's because . . .
Municipal bonds (munis) don’t offer their tax benefit without any downsides; that tax benefit has a downside. Munis may have more risk than higher-quality bonds. We saw this during the 2020 coronacrash, for example - with various muni funds (VWAHX, VCADX, VWIUX) underperforming higher-quality bond funds (VSIGX, VBTLX) during the trough of the market drawdown.
Municipal bonds make the most sense for investors in the highest tax bracket. That’s because those in lower tax brackets don’t receive the same after-tax return. Yet, those in lower tax brackets still pay the same price for munis as those in higher brackets - and take the same risk. This makes munis a lousy deal for investors in low(er) tax brackets.
Consider a silly analogy: an all-you-can-eat buffet. The price for the buffet is the same – regardless of who patronizes it. Potential patrons of that buffet are you and Joey Chestnut. Joey Chestnut is a competitive eater, having won the 2022 Nathan's Famous Hot Dog Eating Contest.
Compared to you, Joey is getting a better deal than you are – because he can eat more than you can. Said differently, you and Joey pay the same price for the buffet, but Joey can take better advantage of it.
It's the same for municipal bonds. If you're not in the highest tax bracket, you pay the same price as investors in the highest tax bracket for municipal bonds. Yet, you’re not getting the same tax advantage that they are. Of course, you still have all the risk (already discussed), too. That’s not a great deal for you. That argues that the tax benefit of munis isn’t worth the cost and the risk (at least compared to someone in the highest tax bracket).
Statistics: Posted by BornInCA — Sat Mar 02, 2024 5:24 pm — Replies 62 — Views 9890