Ride the bailout wave

Avoid: Infrastructure
Buy: Munis

The president's stimulus plan sets aside about $100 billion to build and repair roads, bridges, and schools. Similar efforts are being undertaken by governments around the world. So you may be tempted - like some mutual funds have been - to bet on infrastructure plays, such as equipment maker Caterpillar. Last November the Morgan Stanley Utilities Fund bulked up its holdings in global engineering and construction stocks and changed its name to the Morgan Stanley Global Infrastructure Fund.

But don't be fooled. "At best," says Ed Yardeni, president of Yardeni Research, "federal spending might offset drastic cutbacks that cash-strapped state and local governments have been making on infrastructure." And the recession has put a damper on private infrastructure spending.

Instead, why not invest in cities and states through municipal bonds? Not only are municipalities getting a quarter of that infrastructure money, but Washington is sending an additional $140 billion or so directly into city and state coffers. Yet demand for munis is still poor, which is why their yields are attractive. While 10-year Treasuries pay 2.75%, comparable munis yield 3.63%. Normally, the opposite is true, since munis are tax-exempt. If you're in the 28% bracket, that muni yield is like earning 5.04% on a Treasury.

How to invest: To be safe, go with a diversified municipal bond portfolio that owns hundreds of different securities from a variety of issuers, such as Vanguard Intermediate-Term Tax-Exempt, which is in the Money 70, our recommended list of mutual and exchange-traded funds.

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