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Income exempt from tax for residents of New York and California
By Kathleen M. McBride
October 16, 2007 Advisors who like ETFs may be pleased to hear about two new ones from the 800-pound gorilla of ETF investing, Barclays Global Investors. Barclays announced the rollout of California and New York state-specific municipal bond ETFs, which are listed on the American Stock Exchange and began trading on October 5. New York and California are two states with high state income taxes and many high-income residents, which my make these ETFs very popular among investors residing in those states.
Standard & Poor’s has rated iShares S&P California Municipal Bond Fund (CMF) AAf for fund credit quality, and S3 for fund volatility. S&P rated iShares S&P New York Municipal Bond Fund (NYF) AA+f for fund credit quality, and S3 for fund volatility, according to an October 5 S&P announcement.
The ETFs will each have a 25 basis-point expense ratio—cheap for a muni bond fund—and track the S&P California Municipal Bond Index, and the S&P New York Municipal Bond Index, and will be invested in the respective state’s local and state munis that are also exempt from the alternative minimum tax—that’s notable because not all municipal bonds are AMT-exempt. That means residents of New York and California who invest in the ETF for the state in which they reside should get income from those ETFs that is exempt from federal, state, local, and AMT taxation. "The potential benefits of iShares become more evident in markets that are traditionally illiquid and expensive," according to Noel Archard, Barclays’ head of U.S. iShares product development. ?
The state mini ETFs follow the launch last month of Barclays iShares S&P National Municipal Bond Fund (MUB), which the firm says in the October 5 announcement, currently has assets of $330 million.
Since these are the first of the state municipal ETFs, according to Barclays, IA thought it would be useful to provide the S&P credit rating scale for the ETFs, which ranges from “AAAf' (extremely strong protection against losses from credit defaults) to 'CCCf' (extremely vulnerable to losses from credit defaults). Funds rated 'AAAf' exhibit extremely strong protection against losses from credit defaults; funds rated 'Af' exhibit strong protection against losses from credit defaults; and funds rated 'BBBf' exhibit adequate protection against losses from credit defaults. The ratings from 'AAf' to 'CCCf' may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories,” according to S&P.
S&P bases it’s volatility ratings “on a scale from 'S1' (lowest sensitivity) to 'S6' (highest sensitivity),” with S1 defined by S&P as an “aggregate level of risk that is less than or equal to that of a portfolio comprised of U.S. government securities maturing within one to three years.”
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