"The last few months, we've seen some very large price swings," said Matthew Murphy, a Phoenix-based advisor.

Local governments in particular are running into problems with short-term reset notes used to provide liquidity. Few buyers have been willing to wade into those waters these days as bond insurers and mortgage markets face tough times. That's leaving some municipalities holding a lot of dead weight, so to speak.

"The whole fixed-income market right now is so volatile, it's difficult to get a real handle on how to value specific muni bonds right now," said Roger Nusbaum, a Phoenix-based portfolio manager.

But that doesn't mean muni bond ETFs are poor choices as investments, he added. "It's just that the markets they're covering are in a real mess these days," Nusbaum said.

So who wants to dive in? Well, in my case, a family member has some taxable holdings we're switching from mutual funds into ETFs. Since the funds are actually losing money, we're taking this opportunity to do some tax-loss harvesting and then in a month, consider our options, which include state-specific muni ETFs.

Caveat Emptor

I should mention that this particular portfolio is strictly for retirement and held by someone early in the accumulation phase. So what's going on now in bond markets has less of an impact on our decisions than possibly someone already retired and living on a fixed income.

But if you've got the luxury of time to sit out this current dry spell in bonds, and your tax level makes it worthwhile, muni ETFs can still make a lot of sense. And keep in mind that although muni bond fund yields aren't too great at the moment, neither are yields on taxable bond ETFs.

In many cases, when I've compared equivalent taxable yields for a muni bond ETFs, they're actually quite attractive at this time.

Take CMF, which has a 30-day yield of around 3.90%. That's better than the benchmark 10-year Treasury. It also beats iShares Lehman Aggregate Bond Index (AMEX: AGG). And that's at face value. With the tax savings, you're getting an equivalent 30-day yield right now on CMF of about 6.61%. That's even better than the Vanguard Long-Term Bond ETF (AMEX: BLV) which is yielding around 5.29% at the moment.

So in terms of market timing, you could do worse than investing in munis today. But with such a volatile market, be prepared for a lot of price movement. That's especially true if you're putting money into state-specific muni ETFs.

1 | 2 |