Mairs & Power Minnesota Municipal Bond ETF (MINN)

The Mairs & Power Minnesota Municipal Bond ETF (ticker MINN) buys bonds issued by Minnesota cities, counties, school districts, and other public agencies. When you buy MINN, you are loaning money to the state of Minnesota and its municipalities. In return, they pay you interest — and that interest is not taxed by the federal government or by Minnesota. For Minnesota residents in higher tax brackets, this can be a much better deal than taxable bonds.

What municipal bonds are and why they exist

A municipal bond is debt issued by a state, city, county, school district, water utility, or other local government body. They borrow to build or fix things: schools, roads, water pipes, stadiums, court buildings. Instead of paying for it all at once out of tax revenue, they issue a bond and pay back the loan over twenty or thirty years. The buyer (investor) gets regular interest payments, called the coupon, and gets their principal back at the end.

The magic word is “tax-exempt.” The interest you receive from a municipal bond is not subject to federal income tax. If you are a Minnesota resident and buy a Minnesota municipal bond, the interest is also usually exempt from Minnesota state income tax. If you buy a municipal bond from a different state, that state usually taxes the interest. This tax exemption is a federal subsidy to state and local governments — the federal government gives up tax revenue so that municipalities can borrow more cheaply.

This tax-free status matters enormously if you are in a high tax bracket. Suppose a taxable corporate bond pays 5 percent and you are in a 35 percent combined federal and state tax bracket. After taxes, you keep 3.25 percent. A municipal bond paying 3.5 percent leaves you with the full 3.5 percent — better than the corporate bond after you pay taxes. The higher your tax rate, the more valuable the tax exemption becomes.

Why Minnesota specifically

Mairs & Power is a Minnesota-based investment company. MINN focuses on Minnesota municipal bonds because the company is familiar with Minnesota cities, schools, and utilities. They know the local officials, understand the local economy, and can assess the credit quality of Minnesota borrowers better than a generic national muni fund could. This local expertise can matter. A Minnesota-focused fund can catch problems or opportunities in state and local finances before national muni funds spot them.

The fund also appeals to Minnesota residents for two reasons. First, Minnesota bonds are usually exempt from Minnesota state income tax for residents (out-of-state residents have to pay Minnesota tax on Minnesota muni interest, so the benefit applies mostly to locals). Second, if you live in Minnesota and care about your community, you might prefer that your investment dollars go toward Minnesota schools and roads rather than financing a city in another state.

What the portfolio holds

MINN owns bonds issued by Minnesota entities of all sizes. It includes bonds from the University of Minnesota, bonds from the Twin Cities school district, bonds from Mayo Clinic, bonds from Xcel Energy (the utility), bonds from cities like Minneapolis and Rochester. It also includes bonds from smaller municipalities and special districts you have never heard of — sewage authorities, mosquito-control districts, industrial-development agencies. The fund diversifies across many borrowers so no single default would devastate it, but it can still suffer if Minnesota’s economy deteriorates sharply.

The bonds are typically investment-grade — borrowers with good credit ratings. Minnesota is a wealthy, stable state, so most Minnesota entities have solid credit. The fund usually stays away from the riskiest local borrowers. The typical maturity of bonds held is probably in the 15 to 25-year range, though there is always a mix of shorter and longer bonds.

Interest-rate risk and credit risk

Municipal bonds, like all bonds, fall in price when interest rates rise. If you buy a Minnesota muni bond yielding 3 percent and interest rates move to 4 percent, your bond is now worth less because new bonds pay 4 percent. If you have to sell before maturity, you lock in a loss. Hold to maturity, and you get your principal back — but you have given up higher interest elsewhere.

The second risk is that a Minnesota municipality could run into financial trouble and struggle to pay back the bond. This is rare. American municipal defaults are infrequent. But they happen — Detroit, Stockton (California), and Puerto Rico all defaulted on municipal debt in recent decades. If a Minnesota city’s tax base shrinks or its pension obligations explode, it could cut corners or default. MINN’s focus on investment-grade borrowers lowers this risk, but it is not zero.

Who should own MINN

This fund is best for people who live in Minnesota, are in a higher tax bracket (say, 32 percent or above combined federal and state), and can afford to hold bonds to maturity or for many years. The tax exemption is your advantage, and the longer you hold, the more you benefit from getting back the full interest payment without a tax bill.

It is less ideal for people in low tax brackets, because the tax exemption does not help much. It is also less ideal for people who do not live in Minnesota and do not get the state tax exemption. And it is not the right tool if you need access to your money in the next few years — interest-rate risk means you could take a loss if forced to sell.

Costs and how it trades

MINN’s expense ratio is higher than a national municipal bond index fund, reflecting the cost of the Minnesota expertise and active management. The fund trades on an exchange (you can buy and sell shares any trading day) with reasonably tight spreads, so you can get in and out easily — but remember that selling before maturity locks in your gain or loss based on where interest rates and credit spreads have moved.

The fund pays interest monthly or quarterly, and that income is sent to you tax-free (assuming you are a Minnesota resident and they are Minnesota bonds).

How to research MINN

Read the fund’s prospectus on the Mairs & Power website to see which Minnesota municipalities are the largest holdings. Visit your city’s or county’s financial statements to understand the local government’s credit health. Check whether your overall tax situation favors tax-exempt bonds — use a calculator to compare the after-tax yield of MINN to a taxable bond fund. Ask your financial adviser whether the Minnesota focus is appropriate for your geographic goals and tax situation. Finally, consider whether owning a piece of Minnesota infrastructure aligns with your values — if so, MINN is a straightforward way to earn tax-free income while funding local schools and roads.