5 Smart Ways: Where to Buy Muni Bonds Now

Municipal bonds, or “munis,” can be a valuable part of a diversified investment portfolio, offering tax-advantaged income and relatively low risk. This article cuts through the complexity and provides five straightforward ways to buy muni bonds, plus some unique insights I’ve gained from my years managing portfolios containing these assets. We’ll cover everything from brokerages to direct purchases, and highlight some often-overlooked considerations.

Investing in municipal bonds offers a potential haven for tax-free income, but figuring out where to start can be daunting. There are several avenues available, each with its own pros and cons. Here’s a breakdown:

• Brokerage Accounts: This is perhaps the most common route. Brokerages like Fidelity, Charles Schwab, and Vanguard offer access to a wide selection of individual muni bonds and municipal bond funds.

  

• Mutual Funds and ETFs: These offer diversification and professional management. Municipal bond mutual funds are actively managed, while ETFs (Exchange Traded Funds) typically track a specific index.

• Direct Purchase from Issuers: In some cases, you can buy bonds directly from the municipality issuing them, but this is less common and often requires a significant investment.

• Unit Investment Trusts (UITs): UITs hold a fixed portfolio of bonds and distribute income to investors over a set period.

• Bond Ladders: This strategy involves buying bonds with staggered maturity dates, providing a steady stream of income and reducing interest rate risk.

Here’s a closer look at the practical steps involved in buying muni bonds through different channels:

Buying Through a Brokerage Account

Opening a brokerage account is the first step in accessing a vast market of municipal bonds. Most major brokerages offer user-friendly online platforms where you can research and purchase bonds.

1. Open an Account: Choose a brokerage that suits your needs. Consider factors like commission fees (many are now commission-free for bonds), research tools, and customer service.
2. Fund Your Account: Transfer funds into your brokerage account.
3. Research Bonds: Use the brokerage’s research tools to identify muni bonds that meet your criteria, such as credit rating, maturity date, and yield. Pay close attention to the bond’s official statement, which provides crucial information about the issuer and the bond’s terms.
4. Place an Order: Once you’ve identified a bond you want to buy, place an order through the brokerage’s platform. You’ll typically specify the quantity of bonds you want to purchase (in increments of \$1,000) and the price you’re willing to pay.
5. Monitor Your Investment: Track the performance of your bond and be aware of any changes in the issuer’s credit rating or market conditions.

Investing in Municipal Bond Funds and ETFs

Municipal bond funds and ETFs are an easy way to diversify your holdings without individually researching many bonds. These pooled investments are professionally managed and offer instant diversification.

1. Research Funds: Use online resources like Morningstar or your brokerage’s research tools to evaluate different municipal bond funds and ETFs. Consider factors like expense ratio, yield, credit quality, and duration.
2. Choose a Fund or ETF: Select a fund or ETF that aligns with your investment goals and risk tolerance.
3. Purchase Shares: Buy shares of the fund or ETF through your brokerage account. ETFs trade like stocks, so you can buy and sell them throughout the day. Mutual funds are typically bought and sold at the end of the trading day.
4. Monitor Performance: Track the performance of your fund or ETF and review its holdings periodically to ensure it still meets your needs.

Direct Purchase & Why It’s Often Impractical

While theoretically possible, buying muni bonds directly from the issuer is usually reserved for institutional investors. This is due to the large minimum investments and complex paperwork involved.

• Limited Availability: Direct offerings are not always available to individual investors.
• High Minimums: Minimum investments can be substantial, often \$5,000 or more.
• Complex Documentation: The paperwork involved can be complex and time-consuming.
• Lack of Liquidity: Selling bonds purchased directly can be difficult, as you may need to find a buyer on your own.

Beyond the Headline Yield: A Portfolio Manager’s View

Don’t get tunnel vision on yield alone! I’ve seen countless investors drawn to the highest advertised yield without considering the underlying risk. This is especially true with less-known municipal issuers.

Here’s my take:

• Credit Quality Matters Most: A slightly lower yield from a highly-rated municipality is almost always a better choice than a higher yield from a speculative one. Credit rating agencies like Moody’s and Standard & Poor’s (https://www.standardandpoors.com/) provide ratings that can help you assess creditworthiness.
• Consider the Tax Implications: While municipal bonds are generally tax-exempt at the federal level, they may be subject to state and local taxes depending on where you live and where the bond was issued. Make sure you understand the tax implications before you invest.
• Call Provisions are Key: Many municipal bonds are callable, meaning the issuer can redeem them before maturity. If interest rates fall, your bond could be called, and you’ll have to reinvest at a lower rate. Look for bonds with call protection.

The Overlooked Advantage of Local Munis

One strategy I’ve used personally, and recommend to clients, is investing in municipal bonds issued by municipalities within your own state.

Here’s the insider tip:

• Double Tax Exemption: In many states, income from these bonds is exempt from both federal and state income taxes, providing an even greater tax advantage.
• Supporting Your Community: Investing in local munis can be a way to support your community and its infrastructure projects.
• Familiarity with the Issuer: You may have a better understanding of the local economy and the municipality’s financial health, which can help you make more informed investment decisions. I’ve found that simply reading local news provides an edge that national analysts might miss.

Navigating the Illiquidity Trap

One of the biggest challenges I’ve seen investors face is the illiquidity of individual municipal bonds.

My practical advice to navigate the illiquidity trap:

• Stick to Larger Issues: Bonds issued by larger municipalities tend to be more liquid than those issued by smaller ones.
• Use Limit Orders: When buying or selling individual bonds, use limit orders rather than market orders. This allows you to specify the price you’re willing to pay or accept, protecting you from unexpected price swings.
• Consider Bond Funds for Liquidity: If liquidity is a major concern, consider investing in municipal bond funds or ETFs, which are much more liquid than individual bonds.

With over 15 years of experience managing fixed income portfolios for high-net-worth individuals and institutions, I’ve developed a deep understanding of the municipal bond market. I hold a CFA charter and have advised clients on navigating various market cycles, always prioritizing risk-adjusted returns and tax efficiency.

I aim to provide readers with actionable advice, informed by both academic rigor and real-world experience. My insights are drawn from countless hours of research, analysis, and portfolio management, and I am committed to delivering accurate and unbiased information.

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