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So I want to invest about 50k USD for a year exactly.

CDs: 2.75% by Marcus for a year.

Muni ETFS: The one that I am looking at currently is this. Blackrock muniyield fund. It yields 5.0%+ apparently and is tax exempt at federal level.

I am in the 32% bracket for federal tax purposes, so that's a very decent savings IMO. I am pretty much inclined to invest my money in the Blackrock fund. Is there any reason why I should prefer CD over the ETF?

  • Be aware that over the last 3 years MYD has not grown at 5%. It is returning capital to its investors (and hence its price is dropping). It's tempting to directly compare fund yield to interest rate in a deposit account, but that would be a mistake. – Ben Voigt Mar 31 '19 at 4:13
  • MYD is not showing any return-of-capital in the past three years. There is a declining distribution that is probably due to bond redemptions going into lower dividend rates. The share price has dropped in three years by one-year's dividend or more. – S Spring Mar 31 '19 at 5:37
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What is your risk tolerance? A CD is going to be guaranteed to hold its value. An ETF is not guaranteed. The interest distributed by the ETF may be tax free but the ETF itself may gain or lose much more than the interest you receive. Particularly if interest rates increase over the coming year, the bonds the ETF holds may lose value.

I would tend to assume that if you need the money in exactly a year that you have a particular need for that money at a defined date. Assuming it would be a hardship if the $50k worth of ETF you bought today was only worth, say, $45k in exactly one year, a nice guaranteed CD would tend to make more sense. If you're willing to take a bit more risk in order to grow your investment a bit more, a bond ETF may be a reasonable risk.

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  • I know you don't have a crystal ball, but is there a chance that the interest rates might increase? Also, BTW when you say interest rates do you mean the interest rates that fed controls? (The ones that were hiked a lot last year) – Aditya Mar 31 '19 at 2:15
  • @Aditya - Roughly, yes. If the interest rate that bond investors can receive increases, existing bonds will decline in price since the interest they pay is less valuable. The interest rate that bond investors can receive is related to the federal funds rate (the interest rate the Fed controls) but there are additional factors (i.e. if municipalities get riskier because pension fund arrears increase, the interest rates on new bonds will increase irrespective of the Fed rate). There is always a chance that rates will increase. Or decrease. Or stay the same. – Justin Cave Mar 31 '19 at 4:48
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The suggested muni fund is a closed-end-fund that uses leverage. But also look at fund durations. I can find only slightly shorter durations but then also lower quality bond credit ratings. Well, spend hours comparing one fund to another.

In general, short duration muni funds can be found in ETF's. A yield of something like 1.72% produces a tax-free equivalent yield of 3.04% . What I see has a duration of about six months and the credit quality is AA, A, and BBB.

Of course a short duration relates to the one-year time frame.

I did find a closed-end muni fund with a 2020 date. I use the daily-pricing of cefconnect.com to find and compare closed-end-funds.

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