By Murray Coleman

Trying to find a solid municipal bond exchange-traded fund isn't necessarily the easiest decision to make these days.

A ton of options aren't out on the market yet, but if you live in big states, some possibilities exist. Also some national muni ETFs are now around. Those include the PowerShares Insured National Muni Bond ETF (AMEX: PZA), the SPDR Lehman Municipal Bond ETF (AMEX: TFI) and the iShares S&P National Municipal Bond Index (AMEX: MUB).

Also, State Street Global Advisors has a short-term muni ETF out as well, which provides some diversification possibilities.

"Clearly, new products are being introduced in higher tax states like California and New York," said James Holtzman, advisor at Legend Financial Advisors in Pittsburgh. "But there are municipal bond mutual funds for almost every state. So if you can get lower expenses through an ETF, then that bodes well for the introduction of more muni bond ETFs."

But until that day comes, the pickings are rather slim at this point among state-specific ETFs. And even if you live in a state with a corresponding muni ETF, trying to figure out the best choice isn't always so cut and dried.

For example, my own choices include the SPDR Lehman California Municipal ETF (AMEX: CXA). Another possibility is the iShares S&P California Municipal Bond ETF (AMEX: CMF). The expense ratios are similar (0.25% for CMF and 0.20% for CXA).

Not What They Used To Be

But comparing yields shows that dividends aren't what they were just a few years ago. In this case, the SPDR's site shows that CXA has generated nearly 20 cents per share in monthly dividends. But the ETF launched last October, meaning it only had two full months of trading last year.

Then, compare that to CMF. The iShares site shows distributions since the fund launched last year as well as the most current months of 2008. But, the information indicates that CMF is paying out between 26 cents to 32 cents per share regularly.

That still seems awfully low.

"Given where yields are right now, that's not a surprising range," said Holtzman. "Yields have been relatively low, although we've seen some increases lately with the trouble going on in the credit markets."

If you're fortunate enough to have a state-specific muni ETF at your disposal, then distributions aren't going to be a tax issue for you either at most local or federal levels.

"But you have to keep the tax situation in perspective," Holtzman said. "It's part of the overall ETF's profile. But it isn't the only consideration."

In terms of the California-specific ETFs, performance of late has been all over the map. One is up slightly heading into Monday. But the other is down more than 5% so far this year. That might be related to the fact that CXA holds a somewhat greater level of bonds with long-term maturities, which are more sensitive to economic downturns.

"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.

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