Berko: Tax-free ETFs could free-fall
Friday, September 06, 2013 7:00 AM
Dear Mr. Berko:
I’m concerned about my primary account with Merrill Lynch, which, in the past four years, has been invested in tax-free exchange-traded and closed-end funds. There have been some ups and downs during this time, but my big concern is the drop in value on my $442,000 tax-free portfolio this year. Even with investing all income in additional shares, my net loss in value is now more than $47,000, or more than 11 percent. It would have been a lot more if I had not reinvested all the income every month. My adviser is telling me to hold the investments and then decide what to do in the near future. He believes that the big drops in my portfolio were hypercorrections caused by a seller panic over the Federal Reserve’s announcement about tapering.
The losses have slowed down, but they haven’t stopped. I’m told these investments are paying a good rate, but the losses far exceed my income. My Merrill adviser tells me he hesitates to advise me to liquidate the above investments and move into equities. He says he is looking for other good buys in the tax-frees that will work for me. But by not liquidating the above ETFs, I continue to lose principal. Do you have any suggestions for where I can park some capital with a reasonable rate of return that will be fairly accessible if needed?
B.G., Durham, N.C.
You should be concerned. This account, which is 100 percent invested in fixed tax-free exchange-traded funds, is using dangerous leverage to enhance their yields. If rates move higher, as many observers believe they will, then the value of your ETFs will fall like coconuts from tall palm trees. I’m concerned that this brokster is urging you to endanger this account, encouraging you to expose your assets to such blatant risk. To note a few, BlackRock Muni Intermediate Duration Fund (MUI-$13.77) is down from a recent $17.88; BlackRock MuniYield Quality Fund (MQY-$13.40) is down from a recent $18.54; and BlackRock Corporate High Yield Fund VI (HYT-$11.27) is down from a recent $16.74. That’s unconscionable! This dense dope is derelict in allowing you to bulk up with those leveraged ETFs. But that’s the risk one accepts when taking advice from an average broker who is employed by an average brokerage. He probably doesn’t know that those ETFs are leveraged to the max; they borrow short term at low rates to purchase longer-term municipals at higher rates. I can assure you that the income you receive from those ETFs will begin to fall as much as, if not more than, the principal value. Rates will rise again – you know it, and I know it – but we don’t know when. It’s sort of like the sword of Damocles hanging over your portfolio. It’s a Catch-44; that’s twice as bad as a Catch-22!
It’s smarter to be right too soon than right too late. Federal Reserve Chairman Ben Bernanke has forewarned investors on several occasions that he will begin to taper the $85 billion monthly stimulus. And each time Bernanke has issued a warning, equities and bonds have nose-dived. When that happens, most leveraged investors, like a bunch of stupids, suck their thumbs and sit on their bums!
Your broker is an ignorant toad or a stupid fool, or both. Interest rates have risen slightly, and they will rise more. And when they do, I’ll give you a written guarantee that your tax-free income will crumble, and so will the value of those ETFs. President Barack Obama and Bernanke do not get along, and I’m told there’s palpable animosity between them. Obama wants the Fed to aggressively bail out failing municipalities, which Bernanke staunchly opposes. So there is going to be a new Fed head in January, and he or she won’t be as transparent as Bernanke. I recommend that you liquidate your ETFs and buy some of the excellent master limited partnerships that yield 4 to 7 percent and have a long record of nontaxable but annual dividend growth. Their values will fall when the market falls (though not so much), but their payouts should continue to rise and shine.
The Depot at 4th, 100 4th Street, Des Moines, Iowa 50309 | (515) 288-3336 | © 2015 Business Record. All Rights Reserved. | Legal disclaimer