Seeking Tax-Free Income From Closed-End Funds
by Michael Walters and John Deysher
Four years ago we wrote an article for the AAII Journal highlighting the potential opportunities available in closed-end funds (“Rodney Dangerfield Investing: Closed-End Opportunities,” April 2007).
We think now is a good time to revisit the topic, with a focus on municipal bond closed-end fundsand their newer cousins, municipal bond exchange-traded funds .
In this article
- Why Consider Municipal Bonds Now?
- No Free Lunch
- The Big Three: Basic Differences
- Scrutinizing Closed-End Municipal Bond Funds
- More Information on Closed-End Funds
- A Word About Leverage
- Are Municipal Bond ETFs a Better Alternative?
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Why Consider Municipal Bonds Now?
With most world equity markets near record highs and interest rates near record lows, why consider municipal bonds (aka “munis”)? There are several reasons.
First, municipal bonds remain the only game in town for capturing tax-free income. Municipalities must have a way to compete for investor capital, and keeping their interest tax-free (in most cases) accomplishes this. Other vehicles such as IRAs or tax-deferred annuities allow income to accumulate tax-free, but Uncle Sam must be paid upon withdrawal. There are also limits to what you can put in a retirement plan and lockups on annuities.
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John Deysher is president and portfolio manager of the Pinnacle Value Fund, a diversified, SEC-registered mutual fund specializing in the securities of small and micro-cap firms. He is a CFA charterholder and has managed equity portfolios for over 25 years. He lives and works in New York City and may be reached at firstname.lastname@example.org.