Why You Can’t Count Out California Muni Bond ETFs

California’s citizens took to the polls yesterday to vote on measures that would have helped close the $21 billion budget gap. They rejected all but one, but that doesn’t necessarily mean you should count out the state’s muni bond exchange traded funds (ETFs).

Stacey Vanek-Smith for Marketplace reports that the $21 billion-plus budget shortfall is on the line and deficits are not an option. If tax revenue drops, states either have to cut costs or find more money.

The voters in California voted on measures that would slash the budget for health care and education, two important areas that are already experiencing budgeting problems. The only measure approved was one barring pay increases for state officials, reports Reuters. Since the other measures didn’t pass, the U.S. Treasury may be the next place to search.

The government has already handed out around $150 billion to cover budgeting deficits, so where do we turn next? Perhaps a  mix of issuing bonds, raising taxes and cutting budgets may work.

Are state muni bonds secure? Rob Williams at Charles Schwab points out that California’s bonds might have faced downgrades, but they still have strong investment-grade ratings.

Defaults on muni bonds issued by state and local governments have been historically low, but they are a risk to be mindful of nonetheless. Having an ETF with bonds of varying maturities can help diversify you and help lower these risks.

• PowerShares Insured California Muni Bond (PWZ): up 9.5% year-to-date; current yield 4.63%

• SPDR Barclays Capital California Muni Bond (CXA): up 7% year-to-date; current yield 4.17%

  

• iShares S&P California Muni Bond (CMF): up 4.8% year-to-date; current yield 3.58%

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