The stock market’s volatility has raised concerns regarding potential downturns, prompting investors to seek diversification beyond equities. With several significant drops observed within the year, the need for alternative investment strategies becomes clear. Closed-end funds (CEFs) focusing on municipal bonds are emerging as viable options for bolstering investment portfolios. Issued by state and local governments to fund public projects, these bonds provide dual benefits of income and stability, presenting an opportunity for investors to navigate uncertain market landscapes. Presently, CEFs benefit from favorable market conditions, particularly as the Federal Reserve’s interest rate cuts enhance the value of existing, higher-yielding municipal bonds.
Municipal bonds are particularly appealing as they typically offer tax-free income for most Americans. This tax advantage, when coupled with a high yield—some CEFs providing returns as high as 12.1% on a taxable-equivalent basis—makes them an attractive choice for investors. The low default rates associated with municipal bonds provide an additional layer of security, particularly in a climate susceptible to economic turbulence. Investors can anticipate that in times of market distress, the Federal Reserve may intervene to stabilize the municipal bond market, further enhancing their appeal.
Among the prominent CEFs in the municipal bond sector is the Eaton Vance California Municipal Bond Fund (EVM), which yields approximately 5.3%. With a focus on California-based bonds, the fund facilitates tax exemptions for local investors, providing a compelling income strategy, particularly for those in higher tax brackets. However, the concentration in one state presents geographic risk; any fiscal shortfalls experienced by California could significantly impact the fund. Nevertheless, EVM diversifies its holdings across sectors, including essential services and education, which historically have low default rates.
Another noteworthy option is the Invesco Value Municipal Income Trust (IIM), which offers a higher yield of 7.3%. By diversifying its investments across the nationwide municipal bond market, IIM minimizes risks associated with state-specific economic downturns. However, the fund’s higher yield can be attributed to its investment in lower-rated bonds and revenue bonds, which, while riskier, come with the potential for greater returns. The past few years have seen fluctuations in IIM’s dividends, but a recent increase in payouts signals a recovery and renewal of confidence in this strategy.
One vital aspect of CEFs is their trading at discounts to net asset value (NAV). EVM currently boasts an 8.6% discount, suggesting that it presents a more attractive opportunity given its lower risk profile when compared to IIM’s 6.3% discount. The disparity highlights the potential for EVM being an undervalued option in today’s market environment. Investors concerned with short-term risk and the desire for reliable income streams may find EVM to be the superior choice, particularly in anticipation of stock market volatility.
To conclude, selecting the right municipal bond CEF depends on individual risk tolerance and investment objectives. For California residents or conservative investors seeking stability amidst market fluctuations, EVM represents a solid option due to its focused, safer profile. Conversely, for those with a higher risk appetite and bullish outlook on the market, IIM’s higher yield and diversified approach offer enticing prospects for income and growth. As the investment landscape continues to shift, both funds provide valuable avenues for diversification, highlighting the versatility and resilience of municipal bonds in a dynamic market.