At a point in time when a 10 year treasury earns 3.37%, a 30 year treasury earns 4.44%, and an investment grade corporate bond portfolio with average maturity of 12 years (LQD) has an indicated yield of 4.7% you just have to wonder where any sort of income is available. My first conclusion is that I would rather hold a equity REIT ETF (IYR) at 3.38% than hold a 10 year treasury at 3.37%. My second conclusion is that both yields leave quite a bit to be desired.
My next thought is to look at the current unloved asset class in the investment world – Municipal Bonds. The market vectors long municipal (MLN) earns a whopping 5.34% (average maturity 24.22 years!), the iShares S&P AMT-Free Muni (MUB) earns a healthy 3.63% (average maturity 10.46 years). These funds are interesting because they are federal tax free. Assuming a 25% federal tax bracket ($69-139,500 married filed jointly) that works out to a 7.12% (.0534/.75) and 4.8% tax-equivalent yield respectively. Obviously if you pay more in federal taxes these yields are even higher.
The follow up is to look at the unloved of unloved – closed end muni funds. The beauty of closed end funds is that when people do not like the asset class, the closed end funds can trade at a discount to the NAV – meaning that you can buy the funds for less than you can buy what the fund actually owns. I will not speculate on the value of the funds below, but allow you to peruse the closed end muni funds that trade at discounts to their net asset values.
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Interesting. Investors should note whether the funds are leveraged. I think a quick search shows 4-5 Nuveen funds on above list operate without leverage. (I only looked at the Nuveen website to check; others may also operate without leverage.)
As might be expeced, the ones without leverage trade as less of a discount to NAV. Still worth looking at.
CEFconnect.com
Surlytrader, as you highlight, muni bonds are currently very enticing for individuals in high tax brackets.
Tim W. correctly points out that many closed-end muni funds utilize leverage making them extremely volatile and unsuitable for conservative accounts.
Investors should also consider the expense ratios of these funds which could eat up the discount in a few short years.