Muni Bond ETFs And Retirees: A Match Made In Heaven?

As an asset class, municipal bonds have had plenty of negative headlines to deal with in the past several years. There was the credit crisis of 2008 and the ensuing recession of 2009-2010. Last year, noted analyst Meredith Whitney was featured on "60 Minutes," warning of impending doom in the muni bond market. Also in 2011, Jefferson County, Alabama and Harrisburg, Pennsylvania, the Keystone State's capital, defaulted on muni bond obligations. Stockton, California followed suit earlier this year. Speaking of California, the largest U.S. state by GDP and population, is running deficits that have some pondering further municipal defaults. But just as they did in 2011

. "Despite low interest rates, munis will continue to draw appeal among baby boomers because they prefer the low volatility compared to other asset classes," James Colby, portfolio manager and senior municipal strategist for Market Vectors municipal bond investments, said in an interview with Benzinga. "Munis continue to come through the crucible and they're no worse for the wear." Part of the allure municipal bond ETFs hold for retirees is their steady, tax-free income stream. All six Market Vectors muni bond ETFs pay monthly dividends. The $3 billion iShares S&P National AMT-Free Municipal Bond Fund

also features a monthly distribution. The monthly payout highlights one advantage of an ETF over owning an individual muni issue. "If you buy an individual bond, you get a semi-annual coupon payment," Colby noted. "With muni bond ETFs, you get monthly dividends that are tax exempt and that's an appealing feature for retirees." Arguably, the default risk in the muni bond market is overstated. Colby notes muni bonds are a $3.7 trillion marketplace, but only 2% of that number trades on any given day. "Less than half of 1% of all rated bond issue default," according to Colby. "We will continue to see entities run into great difficulties, but the muni bond market has a great ability to compartmentalize the problem children. One default doesn't provide for contagion across other issues." Investors seem to be buying into that, having added $11.4 billion to U.S. municipal mutual funds this year, the best start since 1993,

. Along those lines, the Market Vectors Long Municipal Index ETF

has risen 6% this year despite

. Low fees of 0.24%, a trailing 12-month yield of almost 4.2% and a monthly dividend make this fund a compelling retirement planning option. "There are a lot of headlines touting negativity in the muni bond marketplace, but this hasn't sent investors scurrying away from the asset class," said Colby. Colby also noted "a huge mismatch between supply and demand" in the high yield space, a catalyst that helps explain why the Market Vectors High-Yield Muni ETF

is up almost 9% this year. With $604.4 million in AUM, a 0.35% expense ratio and a trailing 12-month yield of almost 5.3%, HYD has outperformed more noteworthy bond ETFs by significant margins this year, including the Vanguard Total Bond Market ETF

, the PIMCO Total Return ETF

and the iShares Barclays TIPS Bond

. Other muni bond ETFs suitable for retirement include the Market Vectors Intermediate Muni ETF

, the Market Vectors Pre-Refunded Muni ETF

and the SPDR Nuveen Barclays Capital Municipal Bond ETF

. For more on municipal bond ETFs, please click

.