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Investing in America 2020
It’s not what you earn, it’s what you keep.®
Municipal bonds can help build communities — and investment portfolios
Municipal bonds help build bridges, schools, hospitals, roads and other structures that improve our communities. In addition to enhancing our quality of life, many investors have found municipal bond investments to be a valuable addition to their portfolios.
Municipal bonds are simply debt instruments — money lent by investors to cities, counties, states and political subdivisions, typically for the purpose of financing capital improvements or to refinance existing debt at a lower cost. Owning a municipal bond is similar to owning an IOU. You are owed the principal lent, plus interest, over a given time period. It is important to remember that there are no guarantees of payment.
The municipal bond market has changed
Investing in municipal bonds has become more complicated in recent years. Understanding the market dynamics may help investors evaluate the need for actively managed municipal bond solutions.
Municipal market changes underscore the need for research
Economic uncertainty and changes in credit fundamentals can cause movements in credit spreads, which is the difference between yields of lower- and higher-quality bonds. When spreads shift, opportunities may arise to capture additional yield — the key is understanding the market well enough to benefit.
Supply trends may reduce investor access to tax-exempt municipal bonds
With changes brought about by the Tax Cut and Jobs Act of 2017, municipalities are no longer able to offer advance refunding by issuing new tax-exempt bonds. As a result, tax-exempt municipal bond supply has been outpaced by bond maturities and calls.
Bonds are not created equal — even when their ratings are the same
Because the rating scales have changed, bonds with the same credit rating may show a wide yield range, making it difficult to assess each bond. Investment managers do extensive research to determine if a higher yielding bond is compensating an investor adequately for the risk.
Individual investors are at a pricing disadvantage
There is no central location like an exchange to trade municipal bonds, which can make it challenging for retail investors to obtain the best prices. Buying and selling bonds is generally more expensive for individual investors who trade in smaller blocks of bonds than for institutional investors that buy and sell in bulk.
Capture the tax-exempt advantage
If you are seeking tax relief, the interest earned on municipal bonds is exempt from regular federal taxation. Additionally, bonds issued from entities within a certain state are often exempt from taxation in that state. Occasionally, bonds issued within a certain municipality or region are exempt from taxes in that municipality, possibly providing triple tax exemption — federal, state and local.
The tax-exempt advantage
Municipal bonds can be advantageous, particularly if you are in a higher tax bracket. To make a fair comparison between a tax-exempt investment like a municipal bond and a taxable investment, you need to adjust the tax-exempt investment’s yield to account for money you save in regular federal, and sometimes state income taxes.
Assessing trade-offs among investments
Two is greater than one
Since different asset classes involve different types of risk, diversifying your portfolio can help reduce overall portfolio volatility.A balance of equities and municipal bonds has historically lowered the overall investment risk (measured by standard deviation) and provided attractive after-tax returns compared to an all-equity portfolio.
Over the 20-year period from 1999 – 2018, a portfolio of municipal bonds and equities provided higher or comparable after-tax returns with similar or less risk than equivalent Treasury or corporate blends.
Adding municipal bonds to a portfolio can help reduce risk and improve returns
40% municipal / 60% equity mix assumed less risk and added more after-tax return than an all-equity portfolio over 20 years.
Diversification does not assure a profit or protect against loss.
Municipal bonds may help reduce risk by enhancing portfolio diversification
Low historical correlation to other asset classes provides opportunity to diversify
The returns of municipal bonds over the past 20 years have not been closely correlated with those of U.S. or non-U.S. equities or certain other types of fixed income securities.
Low historical correlation may help dampen volatility
Correlation shows how closely asset classes resemble each other. Adding municipal bonds can diversify your investment portfolio and act as a hedge against return volatility.
What are the features of different types of solutions?
Municipal bond funds may allow investors to:
- Earn tax-exempt income
- Realize attractive after-tax returns
- Diversify an overall investment portfolio
- Reduce overall portfolio volatility
Active management can add value
Nuveen believes five key differentiators are important to creating portfolio growth.
- Credit research: The experienced research team evaluates municipal bonds and sectors, seeking to find value in bonds that the general public may have overlooked.
- Institutional access: Nuveen navigates the inefficient municipal bond market through established relationships with more than 100 national and regional dealers.
- Institutional trade execution: A large presence in the market provides greater access to inventory to find bonds in appropriate sizes and at institutional prices.
- Tax-aware investing: The ability to trade at institutional prices allows the team to efficiently capture tax losses and use them to offset gains.
- Active portfolio oversight: By actively trading bonds, the team seeks to sell appreciated bonds, capture gains and purchase bonds that have the potential to enhance overall portfolio returns.
What are the ways to invest in municipal bonds?
Nuveen offers national and state municipal bond portfolios for investors seeking tax-exempt income.
Separately managed account
- Customized Portfolios
- Intermediate ESG
- Intermediate Term
- Intermediate High-Quality
- Laddered Portfolios
- Limited Maturity
- Municipal Total Return
- AMT-Free Municipal Credit Income
- AMT-Free Municipal Value
- AMT-Free Quality Municipal Income
- Enhanced Municipal Value
- Intermediate Duration Municipal Term
- Intermediate Duration Quality Municipal Term
- Municipal 2021 Target Term
- Municipal Credit Income
- Municipal Credit Opportunities
- Municipal High Income Opportunity
- Municipal Income
- Municipal Value
- Quality Municipal Income
- Select Maturities Municipal
- Select Tax-Free Income Portfolio
- Select Tax-Free Income Portfolio 2
- Select Tax-Free Income Portfolio 3
A word on risk
Investing involves risk; principal loss is possible. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Credit risk refers to an issuers ability to make interest and principal payments when due. Below investment grade or high yield debt securities are subject to liquidity risk and heightened credit risk. The funds’ use of inverse floaters creates effective leverage. Leverage involves the risk that the funds could lose more than its original investment and also increases the funds’ exposure to volatility, interest rate risk, and credit risk. Closed-end fund shares may frequently trade at a discount or premium to their net asset value.
Important information about the study, Two Is Greater than One
You may request a free copy of the “Two is Greater than One” research study to learn more about the potential benefits of a diversified portfolio that includes municipal bonds.
All investment income generated by the portfolio was considered to be reinvested annually, along with the after-tax proceeds of an arbitrarily assumed 20% annualized turnover rate. The allocation between the two assets was allowed to roam within a 1% band around its target before rebalancing. No provision was made for investment fees or commissions. Investment income was taxed at the historically appropriate rate for an individual with $100,000 in taxable income in year 2017 dollars. Net capital gains taxes, if any, were deducted at the rate appropriate for the period. At the end of 2017, the portfolios were fully liquidated to recognize the existing tax liability.
This study was based on historical data gathered from sources Nuveen Asset Management considers to be reliable and consistent. The Methodology applied and results produced by this study indicate past investment performance of market indices over the 1998 - 2017 time period exclusively and in no way should be considered representative of the past performance of any Nuveen Asset Management product or predictive of future investment expectations and performance for the municipal market or Nuveen Asset Management products.
In particular, municipal bond rates during the early portion of the 20-year period were far higher than current municipal rates, and returns for municipal bonds going forward will likely be far less than those shown in the chart. The various types of investments presented involve different types of risk. As shown in the above graph, stocks provided both higher returns and greater volatility than municipal bonds. Municipal and corporate bonds each involve the individual credit risk of the municipal or corporate borrower and the general interest rate risk of lower bond prices due to rising interest rates. While treasuries are backed by the full faith and credit of the U.S. Government as to the timely payment of principal and interest, these securities are also subject to interest rate risk.
Asset class related risks
Different types of asset investments have different types of risks, which may provide higher returns but also greater volatility. In general, equity securities tend to be more volatile than fixed income or hybrid securities. Foreign investments may involve exposure to additional risks such as currency fluctuation and political and economic instability. The value of, and income generated by, debt securities will decrease or increase based on changes in market interest rates. High yield corporate bonds are subject to liquidity risk and heightened credit risk. Government bonds are guaranteed as to the timely payment of principal and interest.
Correlation is a statistical measure of how two securities move in relation to each other. Perfect positive correlation (a correlation co-efficient of +1) implies that as one security moves the other security will move in lockstep, in the same direction. Alternatively, perfect negative correlation (a correlation co-efficient of -1) means that securities will move by an equal amount in the opposite direction. If the correlation is 0, the movements of the securities are said to have no correlation; their movements in relation to one another are completely random.
The Bloomberg Barclays Emerging Markets USD Aggregate Index is a flagship hard currency Emerging Markets debt benchmark that includes fixed and floating-rate U.S. dollar-denominated
debt issued from sovereign, quasi-sovereign, and corporate EM issuers.
The Bloomberg Barclays Municipal Long Bond Index is a subset of the Bloomberg Barclays Capital Municipal Bond Index including maturities of 22 or more years.
The Bloomberg Barclays U.S. Corporate Bond Index measures the investment grade, fixedrate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers.
The Bloomberg Barclays U.S. Long Credit Index is a subset of the Bloomberg Barclays U.S. Credit Index which measures the investment grade, U.S. dollar-denominated, fixed-rate, taxable corporate and government-related bond markets.
The Bloomberg Barclays U.S. Municipal Bond Index covers the USD-denominated long-term tax-exempt bond market.
The Bloomberg Barclays U.S. Treasury Long Index includes securities in the long maturity range of the U.S. Treasury Index. Securities must have a maturity of 10 years or more.
The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada.
The S&P 500® Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy.
If evaluating investment companies, please carefully consider the investment objectives, risks, charges and expenses before investing. For this and other information that should be read carefully, please request a prospectus or summary prospectus from your financial professional or Nuveen at 800-752-8700.
Nuveen Asset Management, LLC is a registered investment adviser and an investment specialist of Nuveen, LLC. Nuveen Securities, LLC, member FINRA and SIPC.