Mutual funds having significant exposure to municipal bonds, also known as "munis," are excellent choices for risk-averse investors looking to derive stable tax-free returns. These funds seek to provide returns with a low level of risk by investing in municipal debt securities issued by state and local governments.
These securities are believed to provide steady returns exempted from federal taxes and in many cases from state taxes as well, making them the preferred choices in a choppy market. Though munis are expected to provide lower yields than taxable bonds, they fetch better returns for investors in high tax brackets if we consider after-tax returns.
Below we share with you four top-ranked municipal bond mutual funds. Each has earned a Zacks #1 Rank (Strong Buy) and is expected to outperform its peers in the future. Investors can click here to see the complete list of funds.
American Funds Tax-Advantaged Growth and Income Portfolio Class A (TAIAX - Free Report) aims for current income, a portion of which is exempted from regular federal income tax. The fund also seeks to grow capital over a long period of time. TAIAX invests in a mix of American Funds in different combinations and weightings. The underlying American Funds aim to generate income from their investments and may consist of growth-and-income, equity-income, balanced and bond funds. TAIAX has three-year annualized returns of 7.6%.
TAIAX has an expense ratio of 0.72% compared with the category average of 0.80%.
Vanguard Long-Term Tax-Exempt (VWLTX - Free Report) fund aims for a high and sustainable level of current income that is exempted from federal personal income taxes. The fund invests the majority of its assets in municipal bonds in the top three credit-rating categories as determined by a nationally recognized statistical rating organization (NRSRO) (e.g., Aaa, Aa, and A by Moody's Investors Service, Inc.) or, if unrated, determined to be of comparable quality by the advisor. VWLTX has three-year annualized returns of 2.9%.
Mathew M. Kiselak is the fund manager of VWLTX since 2010.
Eaton Vance High-Yield Municipal Income Fund Class A (ETHYX - Free Report) aims for high current income exempted from regular federal income tax. The fund invests the majority of its assets in municipal obligations that are issued by or on behalf of states, territories and possessions of the United States and the District of Columbia and their political subdivisions, agencies or instrumentalities. The interest on these obligations is exempted from regular federal income tax. The fund mostly invests in high-yield municipal obligations. ETHYX has three-year annualized returns of 3.8%.
As of March 2019, ETHYX held 395 issues, with 1.65% of its assets invested in MIAMI-DADE CNTY FLA PROFESSIONAL SPORTS FRANCHISE FACS TAX REV 0%.
Vanguard Pennsylvania Long-Term Tax-Exempt Fund Investor Shares (VPAIX - Free Report) aims for current income that is exempted from both federal and Pennsylvania personal income taxes. Therefore the fund invests most of its assets in securities whose income is exempt from federal and Pennsylvania state taxes. The non-diversified fund mostly invests in high-quality municipal bonds issued by Pennsylvania state and local governments, regional governmental and public financing authorities. VPAIX has three-year annualized returns of 3.2%.
VPAIX has an expense ratio of 0.17% compared with the category average of 0.95%.
To view the Zacks Rank and past performance of all municipal bond mutual funds, investors can click here to see the complete list of funds.
Want key mutual fund info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing mutual funds, each week. Get it free >>