The muni market has stabilized since March’s drop.
In March, the panic selling after the first wave of illness related to the pandemic caused sizable drops in the municipal bond market. Over the past few months, it has not only stabilized, but also rebounded sharply. Marc Pfeffer, chief investment officer at CLS Investments, says summer is often a price-positive time for the muni market as bonds mature and supply comes off the market. The muni market also has support from several Federal Reserve programs, which are buying muni bonds. Still, Pfeffer says there are reasons to be cautious as yields have fallen, so investors need to be selective. Here are nine muni bond funds to consider for the long term.
Vanguard Tax-Exempt Bond ETF (ticker: VTEB)
Pfeffer says he likes VTEB for its high-credit offerings and very low cost, adding that Vanguard is one of the best issuers in the muni bond market. VTEB’s expense ratio is 0.06%, which amounts to $6 for every $10,000 invested, one of the lowest among its peers. The exchange-traded fund tracks a market-weighted index of investment-grade debt from state and local governments and governmental agencies. The fund is tax-free at the federal income-tax level and free from the alternative minimum tax. The yield is 2.2%. He also notes that VTEB is up more than 3% this year. “It’s done very well,” he says.
Nuveen Select Tax-Free Income Portfolio (NXP)
Chuck Self, chief investment officer for iSectors, says he uses NXP, which is a closed-end fund. At least 80% of NXP’s holdings must be investment grade at the time of investment, and Self says it is one of the few closed-end funds with less than 1% leverage, reducing risk. NXP has a tax-free income return of 3.4%. The fund has seen strong appreciation as it is trading at a discount to net asset value compared with its three-year average of 4.26%. Investors may want to put this on a watch list to see when the discount widens for a better price. “It fell during the sell-off, but it wasn’t that bad, and it’s recovered somewhat because it’s conservatively run,” he adds. The expense ratio is 0.26%.
iShares Short-Term National Muni Bond ETF (SUB)
SUB tracks a market-weight index of investment-grade debt from state and local governments and government agencies that have remaining maturities of one month to five years. SUB’s duration averages around 2.08 years. The 12-month yield is 1.5%. While that seems low, Pfeffer says, “In this environment, getting that tax-free yield is still relatively decent.” He likes its very low expense ratio of 0.07%, which is an important feature considering interest rates are at historic lows. The fund has a fairly even mix of both revenue and general obligation bonds, and it includes close to 1,300 total holdings.
VanEck Vectors High-Yield Municipal Index ETF (HYD)
Investors who have a higher risk tolerance or a longer time horizon should look at HYD, Pfeffer says. The fund tracks a market-weighted index of high-yield, long-term and tax-exempt muni bonds, and it’s one of the few high-yield muni bond ETFs. It has significant assets under management of $2.9 billion. While it remains down slightly year to date, the fund has rebounded off its March lows. It has a 12-month yield of 4.28%. Ninety percent of the fund’s holdings are revenue bonds, and it has more than 2,200 holdings, minimizing the impact of any one name defaulting. It also comes with an expense ratio of 0.35%.
SPDR Nuveen Bloomberg Barclays High Yield Municipal Bond ETF (HYMB)
HYMB is a muni bond fund that tracks a tier-weighted index of high-yield and investment-grade U.S. muni bonds with at least one year to maturity. Although it’s a high-yield muni bond ETF, it’s slightly more conservative than its competitor ETF, the VanEck Vectors High-Yield Municipal Index ETF. That said, HYMB is for investors who have a higher risk tolerance or a longer time horizon. Thirty-nine percent of its holdings are in investment-grade securities, with 21% rated BBB and 18% rated A. Pfeffer notes it’s still down year to date, but the fund has recovered from its March lows. It has a yield of 3.96%. “It’s a very good fund,” he adds.
JPMorgan Tax Free Bond Fund (PRBIX)
Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA, picks a mutual fund, the JPMorgan Tax Free Bond Fund, for muni bond investors. “The COVID-19 world has altered the municipal bond market, highlighting the benefits of active management,” he says. PRBIX has an above-average yield of 2.57% because of its exposure to primarily high-quality bonds, with additional yield through some limited interest-rate risk assets. CFRA gives PRBIX five stars — its top rating — because of the fund’s modest expense ratio of 0.45% and strong risk-adjusted returns.
Invesco New York AMT-Free Municipal Bond ETF (PZT)
Residents living in high-tax states like California and New York can benefit from buying tax-free municipal bonds in their home states, Pfeffer says. For New York residents, specifically, he likes the Invesco New York AMT-Free Municipal Bond ETF. This fund has a much higher yield than its peer, the iShares New York Muni Bond Fund (NYF), at 2.63% and 2.08%, respectively. Keep in mind, he says, that PZT gets a higher yield because it holds long-dated bonds with at least 15 years to maturity and has an effective maturity of 23.5 years. That puts it at a higher interest-rate risk. That said, PZT’s total return is 3.2% year to date.
Eaton Vance National Municipal Opportunities Trust (EOT)
Jason Escamilla, CEO of ImpactAdvisor, says he uses closed-end funds for his muni bond investors. One of his criteria is a strong margin of safety, meaning a lesser chance of long-term losses. One of his choices is EOT, currently yielding 3.86%, because he says it is trading at around a 6% discount to its net asset value. That compares with a small premium to net asset value the fund has had over the past one and three years. Average effective duration is seven years. The fund uses about 7% leverage to capture higher returns. EOT’s top sectors are transportation, at 22.5%; hospitals, at 13%; and senior living/life care, at 11%.
BNY Mellon Strategic Municipal Bond Fund (DSM)
DSM is another closed-end fund with a favorable margin of safety, Escamilla says. It has a distribution yield of 4.8%, taking advantage of its effective leverage of 38%. The fund’s mandate is to invest at least 80% of its assets in municipal bonds having investment-grade quality, which are bonds rated BBB or higher. Escamilla says the fund’s discount to NAV is 7%, and it is trading well below its three-year average discount of 4.4%. DSM’s top sector is health care, at 22% of the portfolio. Top state allocation is to Illinois, at 12% of the portfolio. Average effective duration is about seven years; leveraged effective duration is eight years, factoring the fund’s leverage. Average effective maturity is 21 years.
Nine muni bond funds to buy and hold:
— Vanguard Tax-Exempt Bond ETF (VTEB)
— Nuveen Select Tax-Free Income Portfolio (NXP)
— iShares Short-Term National Muni Bond ETF (SUB)
— VanEck Vectors High-Yield Municipal Index ETF (HYD)
— SPDR Nuveen Bloomberg Barclays High Yield Municipal Bond ETF (HYMB)
— JPMorgan Tax Free Bond Fund (PRBIX)
— Invesco New York AMT-Free Municipal Bond ETF (PZT)
— Eaton Vance National Municipal Opportunities Trust (EOT)
— BNY Mellon Strategic Municipal Bond Fund (DSM)
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Update 07/30/20: This article was published on a previous date and has been updated with new information.