When it comes to investing in municipal bonds, there is a lesser-known sector that could provide significant opportunities for investors. According to Dan Close, head of municipals at Nuveen, charter school muni bonds are a small but growing part of the market. With increasing demand for charter schools, there is strong supply for these bonds. In fact, the tax-equivalent yield for these bonds can be nearly 8% for those in the highest tax bracket.
The Growth of Charter Schools
Charter schools have been gaining traction due to the pandemic and legislation that supports school choice. The National Alliance for Public Charter Schools reported that there are currently about 8,000 charter schools in the United States serving 3.7 million students. Despite accounting for less than 10% of the overall public student body, charter schools have seen a significant increase in enrollment compared to traditional K-12 public schools.
The Unique Opportunity Set
While traditional K-12 education munis are typically considered investment grade, charter school munis are often not rated. This is because many charter schools are in the early stages of their operating history. However, the higher risk profile of charter school bonds also comes with a much higher yield, making them an attractive investment opportunity for investors looking for higher returns.
Investors considering charter school muni bonds should do their due diligence. Nuveen has a team of analysts dedicated to identifying charter schools with a high likelihood of success. Factors such as location, academic performance, unique curriculum, fiscal management, and legal and security provisions are all taken into consideration when selecting bonds for the portfolio.
Some of the charter schools held in Nuveen’s High Yield Municipal Bond Fund include The Academy Charter School in Hempstead, New York; Norton Science and Language Academy in San Bernardino, California; and Community of Peace Academy in St. Paul, Minnesota. These schools exemplify the criteria that Nuveen looks for in potential investments.
Charter school municipal bonds may not be the first choice for many investors, but they offer a unique opportunity to capitalize on the growth of charter schools and earn higher yields than traditional K-12 education munis. With careful research and selection, investors can potentially benefit from the hidden opportunities in this niche sector of the market.