newjerseynewsroom.com

BY WARREN BOROSON

NEWJERSEYNEWSROOM.COM

BOROSON ON MONEY

This is probably not a great time to invest in New Jersey municipal bonds (per my column of last week). But when the state finally gets its financial act together, New Jersey's bonds should tempt anyone in a higher tax bracket.

Some people foolishly avoid buying munis altogether. The explanation I've heard: These people are terrified of the IRS, and fear that by buying tax-exempt securities, they'll tick off the tax authorities.

But it just isn't so. As Justice Learned Hand once put it, avoiding taxes is kosher; it's evading taxes that's traif (the opposite of kosher – and no, he didn't use those words).

So, which fund should you buy?

In this corner, wearing blue trunks, is the favorite: Vanguard New Jersey Long-Term Tax-Exempt (VNJTX), 800-662-6273, $3,000 minimum first investment.

This fund is rated five stars (tops) by Morningstar, which calls it "an easy choice." Recent yield: 4.2 percent. Over the last 10 years, the fund has returned 5.16 percent a year – and in 2008, that annus horrible, it lost only 3 percent. (The typical N.J. tax-exempt fund lost 7 percent.) In 2009, it rose over 9 percent. The management fee is a piddling 0.16 percent.

Some other nice things about the fund: Most of its bonds are rated AAA (22 percent) or AA (39 percent) – at or near the top. It owns nothing rated lower than BBB. Besides which, the fund doesn't go out very far: Its bonds' average duration was recently 6.8 years. ("Duration" is an improved version of "maturity.")

The fund's virtues have not gone unnoticed. At last report, the fund had $2 billion in assets.

In the interests of full disclosure, I must reveal to you that all the Vanguard funds have a cruel and unfair advantage over their rivals. Their expenses are preternaturally low – because Vanguard shareholders own the funds. There are no intermediaries to siphon off profits. I swear I've spoken with managers of rival fixed-income funds who have wept copious tears over the difficulty of outperforming Vanguard funds because of their running head start.

Okay, in the opposite corner, wearing white trunks, is one formidable challenger: Fidelity New Jersey Municipal Income (FNJHX), with only $633 million in assets and earning only four stars from Morningstar.

But it's no slouch. "There's a lot to like about this fund," writes Morningstar. Its average return of 5.2 percent over the past decade beats all 17 of its New Jersey rivals. (Okay, so the Vanguard fund returned "only" 5.16 percent.)

In fact, this Fidelity fund resembles its rival in a number of respects. It also lost 3 percent in 2008 – and gained over 9 percent last year. Its yield is 3.8 percent (versus 4.2 percent). Its bonds' average duration is 7.4 years (versus 6.8).

Still, the fund's expense ratio in 2008 was 0.45 percent (versus 0.15 percent). Besides which, the minimum first investment is $10,000 (versus $3,000). To invest more money, you need $1,000 (versus $100). To buy shares for an IRA, neither fund has a minimum – but why anyone in possession of all of his or her faculties would stick munis into an IRA is beyond me.

So, which might you choose? I suggest: both. The bonds that the funds buy are different enough to warrant your owning both. The Vanguard fund, for instance, is heavy in education bonds; the Fidelity fund, in transportation bonds. But if you can afford only one, Vanguard is no doubt the way to go. You can obtain a higher yield if you don't confine yourself to New Jersey munis, but then you may have to pay New Jersey taxes on your income from other states.

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I'll be teaching a beginner's course on investing at the County College of Morris in Randolph on Tuesday, Feb. 23, from 7 to 9 P.M. Cost: $30. To register, phone (973) 328-5183.

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