Charter schools are beginning to emerge as a potential investment opportunity in the municipal bond market, offering investors the chance to capitalize on a niche sector with promising returns. According to Nuveen, these education muni bonds are gaining traction due to increased demand for charter schools, presenting a unique investment landscape for those seeking high-yield municipal strategies.
Charter schools represent a small fraction of the education muni bond market but are experiencing a surge in popularity, fueled by the pandemic and legislation supporting school choice. With about 8,000 charter schools serving 3.7 million students in the United States, these institutions have seen a significant rise in enrollment in recent years. In contrast, traditional K-12 public schools have experienced declining student numbers, creating an opportunity for charter schools to thrive in the education sector.
Charter school muni bonds fund the construction, renovation, or purchase of school facilities, offering tax-exempt interest at the federal level and, in some cases, at the state level as well. While most traditional K-12 education munis are considered investment grade, charter school munis are often unrated due to their early operating history. However, this lack of rating does not deter investors, as these bonds provide a higher yield compared to their investment-grade counterparts.
Investing in charter school bonds comes with its own set of risks, primarily due to the schools’ inability to levy dedicated taxes. This higher risk profile is reflected in the higher yield offered by charter school bonds, presenting investors with a unique opportunity to capitalize on early-stage schools’ growth potential. By investing early in a school’s life cycle, investors stand to benefit from credit improvement as the institution expands its facilities and increases enrollment.
Before investing in charter school muni bonds, investors are advised to conduct thorough research to assess the schools’ viability. Nuveen employs four charter school analysts to identify schools with promising prospects for long-term success. Factors such as location, academic performance, curriculum distinctiveness, fiscal management, and legal provisions are taken into consideration to determine the investment potential of these schools.
Nuveen’s High Yield Municipal Bond Fund has holdings in several charter schools, including 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 institutions exemplify the investment criteria set by Nuveen, focusing on schools with strong academic performance, innovative curriculum offerings, and sound financial management practices.
Charter school municipal bonds present a compelling investment opportunity for those willing to take on higher risk in exchange for potentially higher returns. With the demand for charter schools on the rise and favorable tax advantages available to investors, this niche sector in the municipal bond market offers a unique avenue for diversification and growth in investment portfolios.