What is BSMS? (Pros, Cons, and Strategies)
Investing in municipal bonds has long been a preferred strategy for individuals seeking tax-exempt income. One way to easily access these bonds is through an exchange-traded fund (ETF) such as BSMS. Today, we'll explore what BSMS is, along with its advantages and disadvantages, and discuss some strategies for investing in it.
What is BSMS?
BSMS stands for the Invesco BulletShares 2028 Municipal Bond ETF. This ETF is designed to track an index of municipal bonds expected to mature in 2028. It aims to provide income that is typically free from federal income tax.
Unlike typical bond ETFs, BSMS has a defined maturity date. This feature allows investors to have a clearer perspective on the return of principal at maturity, similar to buying individual bonds but with the added diversification of an ETF.
Key Features of BSMS
- Defined Maturity Date: Matures in 2028, which can help investors align their bond investments with their financial goals.
- Tax Efficiency: Income generated is generally exempt from federal income taxes.
- Diversification: Invests in a basket of municipal bonds, thus reducing the risk associated with single-issuer investments.
The ETF seeks to replicate the performance of the Invesco BulletShares® USD Municipal Bond 2028 Index, which consists of investment-grade, U.S. dollar-denominated municipal bonds that mature in 2028.
BSMS Composition
BSMS includes a wide range of municipal bonds, often issued by state and local governments to fund public projects such as schools, highways, and other infrastructure. The bonds in BSMS are all set to mature in the same year, providing an assurance on the timeline for return of principal. This makes BSMS an excellent tool for investors looking to match specific future liabilities or funding requirements.
Pros of BSMS
Tax-Exempt Income
One of the major attractions of investing in BSMS is the tax-exempt income. Municipal bond interest is generally exempt from federal income taxes, making it especially appealing for investors in higher tax brackets. This can enhance the effective yield, making BSMS a compelling option for tax-conscious investors.
Defined Maturity Date
The defined maturity date of 2028 offers an attractive feature for investors. By having a clear timeline for when the principal will be returned, investors can align their investments more closely with their future financial needs. This is unlike traditional bond funds, which don't mature and therefore continually replace bonds as they come due.
Diversification
By investing in a broad range of municipal bonds, BSMS provides a level of diversification that can help mitigate the risks associated with individual bond defaults. This diversification makes it a safer choice for investors who want to invest in municipal bonds but do not have the knowledge or resources to build a diversified portfolio themselves.
Low Credit Risk
BSMS primarily invests in investment-grade bonds, reducing the risk of default compared to non-investment-grade securities. This adds a layer of safety for investors concerned about credit risk.
Cons of BSMS
Interest Rate Sensitivity
One downside to investing in municipal bond ETFs, including BSMS, is interest rate sensitivity. When interest rates rise, the value of existing bonds typically falls, which can negatively impact the share price of the ETF.
Limited Growth Potential
Municipal bonds are generally conservative investments that offer relatively low yields compared to other bond types or equities. As such, BSMS might not be suitable for investors seeking high growth or high returns. It is more appropriate for those looking for steady, tax-efficient income.
Lower Liquidity
Some municipal bonds in BSMS might have lower liquidity compared to corporate bonds or U.S. Treasuries. This can sometimes result in wider bid-ask spreads and may affect the price at which you can buy or sell shares of the ETF.
BSMS Investment Strategies
BSMS is designed for investors looking for a balance between risk and return, with the added advantage of tax-exempt income. Below are some strategies for investing in BSMS:
Laddering Strategy
Investors can incorporate BSMS into a bond laddering strategy. By investing in municipal bond ETFs with different maturity dates, such as the BulletShares series, you can create a staggered portfolio that spreads risk across various maturity periods. This strategy can provide regular income while managing interest rate risks.
Matched-Funding Strategy
If you have a specific future financial goal, such as funding a child’s college education or planning for a significant expense in 2028, BSMS can be a perfect match. The defined maturity date helps ensure that the capital will be available when needed.
Diversify Income Streams
For those already invested in taxable bonds or other fixed-income assets, adding BSMS can provide tax-efficient diversification. This helps in managing the overall portfolio's tax liability and providing a more stable, after-tax income stream.
Dollar-Cost Averaging
To mitigate the risks of interest rate fluctuations, consider employing a dollar-cost averaging strategy by investing a fixed amount in BSMS at regular intervals. This approach can help smooth out the effects of market volatility and build a substantial position over time.
Conclusion
BSMS offers a unique blend of features suitable for tax-sensitive investors requiring predictable income and a defined maturity date. Its pros, which include tax-exempt income, defined maturity, diversification, and low credit risk, make it an attractive investment for conservative profiles. However, potential downsides such as interest rate sensitivity, limited growth potential, and lower liquidity should also be considered.
Strategic use of BSMS within your investment portfolio can be highly beneficial, particularly when aligned with long-term financial goals. Whether you are looking to create a bond ladder, fund a future expense, or diversify your income streams, BSMS provides a flexible and efficient tool to meet these needs.