Need muni ETF recommendations

hawleyl

Hi all,

I have an account with its tax-id separate from my personal Social Security number. The basic guidelines for this account are to pass through dividend and interest for my personal use but capital gains remain invested in the account. I am interested in purchasing some muni ETFs to reduce taxes. I consider the purchases to be long-term holdings subject to rebalancing in accordance with my asset allocation scheme. These shares would represent 3.5% of my 50/50 asset allocation portfolio. I would be interested in your comments on the following ETFs, or other recommendations.

VanEck High Yield Muni ETF (HYD)
SPDR Nuveen S&P High Yield Muni ETF (HYMB)
iShares California Muni Bond (CMF) (I live in California)

msf

I've always been fond of BCHYX (yet another misclassified fund, as it is generally grouped with long term Calif. munis, not HY).

Perhaps something to investigate is what constitutes "dividend and interest" for distribution purposes. A first question is whether the trust (from your description I assume that's what we're talking about) says "dividend and interest" or "income".

While mutual fund cap gains dividends are generally not considered income, it doesn't seem as clear they wouldn't fall under the "dividend and interest" guideline - if that's the actual wording that was used. I'm not a lawyer or accountant, so take these comments as random mullings, certainly not advice.

Here's a brief primer on what seems to be current Calif. law:
The Uniform Principal and Income Act

This is the first I've read of this - so not only am I not a professional, I'm barely an amateur on this subject.

It appears that the law is catching up with investment practices and recognizing that prudent investing often calls for focusing on total return - even for income beneficiaries. That might broaden your investment options.

To enable investing for total returns, the law now seems to allow some capital gains (part of those returns) to be treated as income for distribution purposes.

Of course there are prohibitions against self-dealing. It sounds like you're both the beneficiary and trustee, which would make such treatment (called "reallocation") illegal. The article discusses what one can do in this situation (designate an independent trustee).

hawleyl

@msf Thanks for the comments and link to the Uniform Principal and Income Act. I will check with my attorney but I do remember him indicating I should leave the principal intact and take distributions of income. Note that I should not have mentioned “capital gains” but “leave principal intact”.

I use Vanguard ETFs and try to maintain a 60/40 stock to bond ratio asset allocation, so believe that should qualify as “prudent”. I’m not sure what to make of the Uniform Principal and Income Act. It appears I will need to discuss it with my trust attorney and tax preparation CPA.

msf

Not trying to create more work/problems for you - just offering suggestions if you're trying to distribute more. It's hard to argue that 60/40 is not prudent, in the absence of some special need.

FWIW, the article also says that if you reinvest fund dividends, they become principal.

Ted

@hawley: For your information, U.S. News & World Report's ranking of Muni ETFs.
Regards,
Ted
http://money.usnews.com/funds/etfs/municipal-bond

00BY

I have a baird mutual fund BMBIX and would recommend it as well as a few other of their mf. There are a bunch of cef in on this space also that you may want to consider.