E*TRADE Offers Municipal Bond Ideas for Tax-Free Investing – Investopedia (blog)

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Looking for some tax-free investing? E*TRADE points to municipal bonds as a way to achieve that. According to the New York-based discount brokerage, for investors with taxable accounts, municipal bonds may be attractive given they can generate interest that is free from federal, state and local income taxes. Municipal bonds, or munis, are issued by state and local governments to help cover expenses and to fund capital improvements.

When it comes to how to play munis with an eye toward tax-free investments, E*TRADE Financial Corporation (ETFC) highlighted a few options. Take muni national short portfolios for starters. According to the discount brokerage, these portfolios invest in bonds that are issued by state and local governments with the funding going to bankroll public projects. The income from the bonds tends to be free from federal taxes and/or from state taxes. The portfolios reduce their risk exposure by spreading the bond holdings across different states and sectors. E*TRADE said these portfolios tend to have durations of less than four and a half years or have average maturities that are less than five years in length.

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Another option is muni national intermediate portfolios, which E*TRADE said also invest in bonds in different state and local governments that are using the money for public projects. The income from those bonds, said the brokerage, is typically free of federal taxes as well. The portfolios tend to have durations of four and a half to seven years or average maturities of five to twelve years.

Investors who want a longer-duration investment can go for muni national long portfolios, which invest in bonds issued by state and local governments. These investments generate income that is tax free from a federal perspective and invest in bonds that have durations of more than seven years or average maturities of greater than twelve years.

As for risk-seeking investors, E*TRADE pointed to high-yield muni portfolios that invest 50% or more of their assets in high-income municipal securities that are not rated or that have a rating from Standard & Poor’s or Moody’s of BBB or below. Muni single-state portfolios, which invest in bonds of a single state, also give investors tax-free exposure both at the federal and state levels.

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