recommendation request: low exp. ratio CA muni bond fund

Hi all

I've been lurking on this newsgroup for a while and I have to thank many of
you for helping me learn a lot about interest rates, their effects on bond
yields and a whole lot more.

I have a question for the group. My wife and I are in the 33% tax bracket;
we live in CA. We're looking to invest in a good CA muni bond fund with a
low expense ratio. We do have some bond funds at Vanguard - Total Bond
Index, GNMA, Short-term investment grade. But I read a recent article in the
NY Times that essentially said that CA residents should seriously look at CA
munis. Can someone please clarify: are these exempt from both Federal and
State income tax?

Separately, I note that the yield (for the next 6 months at least) on the
I-bonds is a whopping 6.73%. I find that just too juicy to ignore. Of
course, the "fixed" portion of the return is a paltry 1%, with the rest of
the return tied to the rate of inflation.

One of our objectives is to fund our son's college tuition: he graduates
high school in 3 years. So if we want to maximize our returns, where should
we be investing? In the I-bonds or in the CA munis? Or adding to our
Vanguard bond holdings? We don't yet have a 529 in his name, so there's that
option to consider as well.

Thanks in advance!

RG

Re: recommendation request: low exp. ratio CA muni bond fund

Long or intermediate?
Have you considered CEF's?

Re: recommendation request: low exp. ratio CA muni bond fund

RG wrote:
> I have a question for the group. My wife and I are in the 33% tax bracket;
> we live in CA. We're looking to invest in a good CA muni bond fund with a
> low expense ratio.

Well, since you're already with Vanguard, look no further than
Vanguard's set of CA tax-exempt funds:
CA Tax-Exempt Money Market (90 days or less)
CA Intermediate-Term Tax-Exempt (6 to 12 yrs)
CA Long-Term Tax-Exempt (12 to 25 yrs)

> Can someone please clarify: are these exempt from both Federal and
> State income tax?

Yes, it says right in the fund overview. To get the tax-adjusted yield,
divide the listed yield by 1-0.33-0.0925 = 0.5775.

> Separately, I note that the yield (for the next 6 months at least) on the
> I-bonds is a whopping 6.73%. I find that just too juicy to ignore. Of
> course, the "fixed" portion of the return is a paltry 1%, with the rest of
> the return tied to the rate of inflation.

It's not quite as good as it sounds. Since inflation spiked this
period, it's probably going to be very low next period, perhaps only 2%
composite. Average 6.73% with 2%, and you'll end up with a more down to
earth 4.4% for the year.

> One of our objectives is to fund our son's college tuition: he graduates
> high school in 3 years.

Tough call. I-bonds have no capital gains tax for education, but they
have a 3-mo penalty before 5 years. Bond funds might lose value as
interest rates rise. I'd say the CA money market fund. That is
currently yielding tax-adjusted of 2.56%/0.5775 = 4.4%. Unlike the
intermediate and long term bonds, it won't lose value as yields rise.

Re: recommendation request: low exp. ratio CA muni bond fund

Thanks Bucky (and Ed).

Well, we're already in the Vanguard CA tax-exempt money market - I was just
looking for something yielding more than 4.4% tax-equivalent. ;-) ;-).

We've also been steadily adding to our 6month (26 weeks) Treasury bill
holdings - laddering them by buying a little every other week for the past
year. (Thanks to Elle for that idea a few months ago). The Vanguard CA
tax-exempts are pretty much proxies for the 90-day T-bills, with the 180-day
bills yielding about 4.25% and being CA-state tax free, they are a slightly
better investment now than is the CA tax-exempt MMF.

I've also been looking at a couple of funds offered by Nuveen. These are
exchange-traded Muni closed end funds. Here are some numbers from Nuveen's
Feb 28 '05 semi annual report (I ought to get the latest report but I'm lazy
;-) ):
all numbers annualized:
non insured funds:
NCU: insured CA premium income: 1year: 5.89, 5year: 9.99
NAC: 1 year: 5.27% 5yr: 11.85%

NQC: investment quality muni: 1 year: 5.05 5 year: 9.07%

insured CA funds:
NKL: 1year: 4.6 5 year: N/A
NKX: 1 year: 4.86 5 year: N/A

Anyone here invest in any of the Nuveen CA funds? There are 14 of them (at
least) and I can't really tell which one(s) would be best suited for a 3 to
5 year investment.

What I do know is the following:
:as of Feb 28, 2005, all six of these funds (NCA< NUC, NVC, NCP, NCO, NQC)
continued to offer excellent credit quality, with allocations of bonds rated
AAA/US guaranteed and AA ranging from 55% in NCA and 70% in NUC to 71% in
NVC, 72% in NCP, 73% in NCO and 76% in NQC.

So given all this, if I want the highest rated holdings in my CEF, I should
perhaps dollar-cost-average into NQC, no? Yes, trading expenses could erode
total earnings if I buy these through a broker. Are there better ways to buy
the Nuveen funds?


RG


"Bucky" <> wrote in message
news:
> RG wrote:
>> I have a question for the group. My wife and I are in the 33% tax
>> bracket;
>> we live in CA. We're looking to invest in a good CA muni bond fund with a
>> low expense ratio.
>
> Well, since you're already with Vanguard, look no further than
> Vanguard's set of CA tax-exempt funds:
> CA Tax-Exempt Money Market (90 days or less)
> CA Intermediate-Term Tax-Exempt (6 to 12 yrs)
> CA Long-Term Tax-Exempt (12 to 25 yrs)
>
>> Can someone please clarify: are these exempt from both Federal and
>> State income tax?
>
> Yes, it says right in the fund overview. To get the tax-adjusted yield,
> divide the listed yield by 1-0.33-0.0925 = 0.5775.
>
>> Separately, I note that the yield (for the next 6 months at least) on the
>> I-bonds is a whopping 6.73%. I find that just too juicy to ignore. Of
>> course, the "fixed" portion of the return is a paltry 1%, with the rest
>> of
>> the return tied to the rate of inflation.
>
> It's not quite as good as it sounds. Since inflation spiked this
> period, it's probably going to be very low next period, perhaps only 2%
> composite. Average 6.73% with 2%, and you'll end up with a more down to
> earth 4.4% for the year.
>
>> One of our objectives is to fund our son's college tuition: he graduates
>> high school in 3 years.
>
> Tough call. I-bonds have no capital gains tax for education, but they
> have a 3-mo penalty before 5 years. Bond funds might lose value as
> interest rates rise. I'd say the CA money market fund. That is
> currently yielding tax-adjusted of 2.56%/0.5775 = 4.4%. Unlike the
> intermediate and long term bonds, it won't lose value as yields rise.
>

Re: recommendation request: low exp. ratio CA muni bond fund

RG wrote:
>
> Thanks Bucky (and Ed).
>
> Well, we're already in the Vanguard CA tax-exempt money market -
> I was just looking for something yielding more than 4.4% tax-
> equivalent. ;-) ;-).

Your taxable equivalent is probably a little less than that. One
response wrote:
:: Yes, it says right in the fund overview. To get the tax-adjusted
:: yield, divide the listed yield by 1-0.33-0.0925 = 0.5775.
:: [...]
:: I'd say the CA money market fund. That is
:: currently yielding tax-adjusted of 2.56%/0.5775 = 4.4%.

Since you and your wife are in the 33% Federal tax bracket
(see Schedule Y1 in Fed tax rate tables:
)

your California income tax is almost surely well over $10K
(see Calif. Tax rate tables:
)

That means that based on state income tax alone, your deductions exceed
the standard federal deduction of $10K.
(See box to left of line 39)

So, you itemize. Since you itemize, the impact of state income taxes is
reduced, because for every $1 in state taxes you pay, you get to pay 33%
* $1 less in federal taxes.

That means that your combined Fed/Calif. rate is:
0.33 + 0.093 - 0.33 * 0.093 = 0.39231

The divisor you need is thus 1 - 0.39231 = 0.60769

That makes the tax-adjusted yield 2.56%/0.60769 = 4.2%

Also, be advised that the Vanguard Calif. Tax-Exempt MMF, while legally
required to be at least 80% free of income subject to AMT (since it
calls itself "tax-exempt"), may barely meet that requirement. Last
year, 15.6% of the income was subject to AMT.


Because of this, you might also consider Fidelity's Calif. AMT-free MMF
It tends to pay a little less, but is supposed to be 100% free of AMT,
which tends to make the after tax returns equivalent if you are paying
AMT.

> We've also been steadily adding to our 6month (26 weeks) Treasury bill
> holdings - laddering them by buying a little every other week for the
> past year. (Thanks to Elle for that idea a few months ago). The
> Vanguard CA tax-exempts are pretty much proxies for the 90-day T-bills,
> with the 180-day bills yielding about 4.25% and being CA-state tax
> free, they are a slightly better investment now than is the CA tax-
> exempt MMF.

As above, remember that cutting out the state tax is only saving you
0.67 * 0.093 or 6.231% (because you lose the deduction of the state
income tax). You may still come out ahead, but you should look at this
closely.

> I've also been looking at a couple of funds offered by Nuveen.

Looking first at open end funds, a couple of families I would look at
are Vanguard (because of low cost), and American Century. The latter is
based in California (it is a combination of 20th Century and Benham, the
latter still maintaining its office in Mountain View, Calif.). It seems
to know the California market well enough to make up a small cost
difference in good bond selection.

You'll want a short/limited duration fund, since you are looking at a
fairly short investment horizon. Vanguard doesn't offer one.

Another place to look is Fidelity. It just started a short/intermediate
Calif. fund, that is 100% AMT free.


> These [Nuveen] are exchange-traded Muni closed end funds. Here are some
> numbers from Nuveen's Feb 28 '05 semi annual report (I ought to
> get the latest report but I'm lazy
> ;-) ):
> all numbers annualized:
> non insured funds:
> NCU: insured CA premium income: 1year: 5.89, 5year: 9.99
> NAC: 1 year: 5.27% 5yr: 11.85%
>
> NQC: investment quality muni: 1 year: 5.05 5 year: 9.07%
>
> insured CA funds:
> NKL: 1year: 4.6 5 year: N/A
> NKX: 1 year: 4.86 5 year: N/A
>
> Anyone here invest in any of the Nuveen CA funds?

I know Nuveen by reputation (muni-bond focused house) only. I suggest
avoiding leveraged bond CEFs now (most are). See, e.g.

"Is Leverage Dangerous Today", where Morningstar discusses the risks,
and also speaks highly of NCA (not leveraged), while the writer says he
is getting out of NKX because it is leveraged. Article date 7/28/2005.

Just some more food for thought.
--
Mark Freeland