Exchange-Traded Funds For Dummies, 3rd Edition

Chapter 15

Moving Beyond Basics into Municipal and Foreign Bonds

IN THIS CHAPTER

Finding tax-free interest in your bond portfolio

Exploring bonds beyond U.S. borders

Understanding how currency hedging works

Choosing ETFs that resemble individual bonds

Every investor needs bonds. Not every investor needs municipal bonds or foreign bonds. But for higher-income investors who find themselves in the northern tax zones, municipal bonds, which pay interest exempt from federal income tax (and possibly state and local income tax as well), can make enormous sense. For those with larger bond portfolios, the added diversification of foreign bonds is something to consider very seriously.

Municipals for Mostly Tax-free Income

Historically, municipal bonds have yielded about 80 percent of what Treasury bonds of similar maturity yield. As I write these words, the two kinds of bonds have yielded about the same recently — mostly due to Treasuries paying less and less. But that’s on a before-tax basis. After taxes, you will likely do better with munis, even if you’re not in the highest tax bracket. ...