Muni Bond ETFs Get Socked

As a result of the recent actions of the Federal Reserve, municipal-bond exchange traded funds (ETFs) took a dip, but don't let that throw you off from this safe-haven investment.

The iShares S&P National Municipal Bond ETF (NYSE: MUB) dropped 5.5% through the first two weeks of November, remarks Matthew D. McCall for IndexUniverse.

The Fed's "QEII" program propped up bonds and put downward pressure on interest rates. However, the markets are showing that the exact opposite has occurred.

Investors should note that large state and local deficit are the biggest risk in muni bonds. If a state or city goes bankrupt, the federal government will most likely bail them out and the bonds would still make quarterly dividend payouts.

After the Republicans took over more seats in the House, the likelihood of extending Bush tax cuts has increased, which means that the tax-haven quality of muni bonds will no longer be necessary. Additionally, there are also rumors of an extension on the Build American Bond program, which, again, would steer investors away from munis.

McCall believes that MUB and Market Vectors High-Yield Municipal Bond ETF (NYSE: HYD) will experience a snap-back rally in the coming weeks as investors come to see that U.S. states and cities aren't going bankrupt.

To monitor this situation, we suggest watching the trend lines for signs of life...or death.