Yes, the municipal bond tax issue has been settled
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Dear Mr. Berko:
Last year you wrote that the U.S. Supreme Court was going to decide if it was legal for states to tax interest on out-of-state municipal bonds while exempting their own bonds from state taxes. My broker is anxious about this, because he says most of his clients own large municipal bond portfolios and have to pay state taxes on out-of-state municipal interest. Please bring us up to date. My broker also wants me to trade currency futures. He tells me he can make 50 percent to 70 percent a year trading currency futures, and I’m thinking about investing $25,000.
G.K., Harrisburg, Pa.
Dear G.K.:
There can only be two reasons your broker doesn’t know the answer to your municipal bond tax question:
1. You’re actually his only municipal bond client.
2. He’s dumber than a goldfish.
That question entered limbo in 2003. That’s when
a couple from Kentucky argued that their state should not be permitted to treat interest on out-of-state municipals differently from interest on Kentucky bonds.
In May of this year, the U.S. Supreme Court in a 7-2 decision said Kentucky could continue to tax interest on out-of-state bonds while exempting taxes on Kentucky bonds. So your state of Pennsylvania can continue to tax the interest on your out-of-state municipals. Sorry, but that’s the whole kettle of fish in a nutshell.
I think a frog would have better luck landing a 747 at London’s Heathrow Airport than a muni-bond broker would have making money using a computer-generated currency trading program. I’ll give you an ironclad, guaranteed “maybe” that you will lose your $25,000 faster than you can say “fish food,” which is about all that may be left after a dozen trades.
Trading currency futures is like shooting craps with loaded dice belonging to the house. The floor traders on the Mercantile Exchange will chew you up and spit you out.
Civilians don’t make money in the futures market unless they have a special angel watching over them. And your broker’s 50 percent to 70 percent profit projections seem to suggest an overabundance of wacky weed in his body chemistry.
If you feel an itch to scratch the currency market, there’s an infinitely safer and more sensible way to play the game using exchange-traded funds. ETFs are mutual funds that trade like stocks on the New York Stock Exchange.
Unlike open-end funds, which
are bought and sold at the end of each day, ETFs are traded throughout the day. So you might consider looking at exchange-traded bond funds such as the Australian Dollar Trust (FXA-$98.08) or the British Pound Sterling Trust (FXB-$200.47) or the Swiss Franc Trust (FXF-$98.17) or the Euro Trust (FXE-$159.35).
These trusts provide an unadulterated exposure to the currency of their representative countries.
Unlike currency-denominated bonds, FXE is shorn of interest and credit rate risks. The FXE’s current yield is 3 percent, and when this interest is converted back to dollars, the investor reaps any currency appreciation as well.
The Australian Trust, yielding 5.2 percent; the Swiss Franc Trust, paying 1.2 percent; and the British Pound Trust, paying 4.9 percent, each has its country’s currency portfolios managed in similar fashion.
The Australian and Swiss ETFs have gained 20 percent or better plus interest in the last 12 months; the British ETF is up 10 percent plus annual interest. ETFs are also available in other currencies.
Meanwhile, I’d suggest trading brokers, because this one is definitely dangerous to your wealth.
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