How risky is a state specific muni fund?

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ChinchillaWhiplash
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How risky is a state specific muni fund?

Post by ChinchillaWhiplash »

How dangerous is it to hold a large amount of a single state municipal bond fund? Have not heard of a state defaulting and would think it is pretty rare. Would expect higher volatility just from less bonds than a national fund. I would guess that it is probably a good idea to diversify with a national fund to at least smooth things out a bit. How much of a state specific fund should you hold in relation to national? Currently in 35% fed and fixed state tax of around 5%. Looking for any tax savings I can get.
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retired@50
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Re: How risky is a state specific muni fund?

Post by retired@50 »

ChinchillaWhiplash wrote: Wed Sep 22, 2021 6:07 pm How dangerous is it to hold a large amount of a single state municipal bond fund? Have not heard of a state defaulting and would think it is pretty rare. Would expect higher volatility just from less bonds than a national fund. I would guess that it is probably a good idea to diversify with a national fund to at least smooth things out a bit. How much of a state specific fund should you hold in relation to national? Currently in 35% fed and fixed state tax of around 5%. Looking for any tax savings I can get.
It's a hard question to answer... How dangerous?

Vanguard rates state specific municipal funds as 2 or 3 on a scale of 1 to 5.

If you live in a state that Vanguard serves with their municipal bond funds, I wouldn't hesitate to use them.
When I was working (and in a higher tax bracket), I used the two funds linked below. Over 6 figures in each.
https://investor.vanguard.com/mutual-fu ... view/vcadx
https://investor.vanguard.com/mutual-fu ... view/vclax

Regards,
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Elric
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Re: How risky is a state specific muni fund?

Post by Elric »

ChinchillaWhiplash wrote: Wed Sep 22, 2021 6:07 pm How dangerous is it to hold a large amount of a single state municipal bond fund? Have not heard of a state defaulting and would think it is pretty rare.
Keep in mind that muni bond funds invest in state and LOCAL bonds. For a state specific funds, they invest in state-issued bonds and other state tax exempt bonds for entities in that state (city and county governments, public universities, etc.). Some localities HAVE defaulted. One of the risks with state-specific is that issues affecting the state may affect all or most bond issuers in that specific state. So the risk of issuers within a state are less independent of one another than a broader set of issuers.

That said, even when a locality defaults, it still tends to pay a sizeable portion of what's due, and that risk is still very low. And the Vanguard California examples another poster listed is primarily in A and above rated bonds.

I've seen folks mention splitting 50/50 between state specific and broader. For what's it's worth, the muni portion of my portfolio is 100% in muni bonds from my state, all rated AA or AAA. I also have treasuries and a corporate bond fund, so I'm comfortable with a bit more risk and/or volatility than the "don't take any risk on the bond side" set of Bogleheads.
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ChinchillaWhiplash
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Re: How risky is a state specific muni fund?

Post by ChinchillaWhiplash »

Looked at VTEB and it is about 40% CA or NY, so it has a high state concentration anyway. Not many funds available in my home state, so pretty limited. Fund I was looking at only has 134 holdings in it. Duration and quality are good, but the small amount of holdings doesn’t diversify it very much. Thinking a mix of the 2 might be best. Will probably go with around 50/50 or a little more towards VTEB.
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