Another challenge for muni bond investors is the changing landscape of municipal bond insurance, which can be purchased by investors to ensure that a muni bond's interest and principal will be paid on time if the bond issuer is unable to do so. At the time of the financial crisis, some 55 percent of municipal bonds were insured, and more than 70 percent carried a rating of AAA (the top rating), Dillon said.
But the insurers were hurt by venturing into mortgage-backed securities in the years leading up to the financial crisis, and several lost their AAA status. Just 5 percent of new muni issues carries insurance, and many major bond insurers have lost their AAA credit ratings.
Given all these shifting trends, experts suggest keeping these tips in mind when considering a muni bond investment.
Dillon recommends national funds, rather than state funds that could leave investors overexposed to a local financial problem. If you are determined to lock in the added tax exemption provided by a fund specializing in muni bonds from your state, "look underneath the hood" to see what the fund owns, he said.
Foos recommends taking a close look at the quality of the research by a fund's managers. Bond issuers can be somewhat opaque when it comes to disclosure, she said, so expertise is key.
It's important to manage expectations too. Munis may not deliver stellar returns this year. But Alwine said they still have a role to play.
"What the stock market has been going through recently is why you own bonds," he said. "They still serve as a diversifier, stabilizer and an income producer. They still have a place in investors' portfolios."