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• December 29, 2008

By John Derrick, Director of Research

We all know that 2008 has been a rough year for virtually all investors, and the municipal market has not been immune. Municipals, however, have weathered the storm better than most asset classes.

Over the long term, municipals have “provided strong taxable-equivalent returns with lower volatility relative to their taxable counterparts,” according to Barclays Capital. The chart below shows the relative risk and after-tax performance of major equity and fixed income asset classes.

Tax-exempt municipals (marked as “TE Muni” on the chart) have provided higher levels of after-tax returns than Treasuries or corporate bonds over the past 10 years, and these returns have come with lower volatility, as measured by annual standard deviation of returns.

The current market environment has witnessed numerous market dislocations that have led to extreme moves due to fear and greed. These dislocations produce both opportunities and threats, but now a significant opportunity appears to be at hand for municipals.

The chart below shows the historical relationship between the 10-year Treasury and high-quality municipal bonds of the same duration. Since 1991, 10-year municipals have traded within a range of 70 percent to 100 percent of the equivalent Treasury, with the average around 83 percent. Historically, the lower yield of municipals compared to Treasuries is due to credit quality characteristics and federal income tax exemption.

 

Ten-year municipals are currently trading at roughly double the yields that can be found in 10-year Treasuries, and this is occurring in a safety-minded market in which they would normally trade at a discount.

As of last Friday, 10-year municipals were yielding 4.27 percent, compared to 2.13 percent for the equivalent Treasury. On a tax-equivalent basis, the municipal yield is comparable to a taxable bond yield of 6.57 percent for investors in the highest tax bracket.

We have witnessed many firsts over the past year, and this appears to be yet another one. For those who appreciate history and understand the current market dynamics, this unusual situation could represent an investment opportunity worth considering.

What is Your Tax Advantage?

Total Annualized Returns As of November 30, 2008

Fund	1-Year	3-Year	5-Year	10-Year	Gross Expense Ratio	Capped Expense Ratio
Near-Term Tax Free (NEARX)	1.82%	3.06%	2.40%	3.35%	1.87%	0.45%
Tax Free (USUTX)	-1.13%	2.40%	2.37%	3.43%	1.92%	0.70%

Gross expense ratio as stated in the most recent prospectus. The Adviser for the Near-Term Tax Free Fund and the Tax Free Fund has contractually limited total fund operating expenses (as a percentage of net assets) to not exceed 0.45% and 0.70%, respectively, through September 30, 2009, or until such later date as the Adviser determines. Performance data quoted above is historical. Past performance is no guarantee of future results. Results reflect the reinvestment of dividends and other earnings. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Performance does not include the effect of any direct fees described in the fund’s prospectus, which, if applicable, would lower your total returns. Obtain performance data current to the most recent month-end at www.usfunds.com or 1-800-US-FUNDS.

Please consider carefully the fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Tax-exempt Income is federal income tax free. A portion of this income may be subject to state and local income taxes, and if applicable, may subject certain investors to the Alternative Minimum Tax as well. Bond funds are subject to interest-rate risk; their value declines as interest rates rise.

• Global Resources Fund
  PSPFX $8.72 +0.08
• Gold and Precious Metals Fund
  USERX $17.25 +0.18
• World Precious Minerals Fund
  UNWPX $19.21 +0.13
• China Region Fund
  USCOX $8.50 No Change
• Eastern European Fund
  EUROX $9.05 +0.03
• Global Emerging Markets Fund
  GEMFX $8.15 +0.01
• Global MegaTrends Fund
  MEGAX $7.67 +0.03
• All American Equity Fund
  GBTFX $19.86 +0.15
• Holmes Growth Fund
  ACBGX $15.79 +0.19
• Tax Free Fund
  USUTX $12.61 No Change
• Near-Term Tax Free Fund
  NEARX $2.27 No Change
• U.S. Government Securities Savings Fund
  UGSXX $1.00 No Change
• U.S. Treasury Securities Cash Fund
  USTXX $1.00 No Change