With the Federal Reserve holding its policy interest rate steady yet again at 4.25% to 4.5%, investors continue to enjoy above-average yields from fixed income.
Compared to the pre-2022 era, both bond mutual funds and exchange-traded funds (ETFs) are paying out more income on average, and have partly recovered from the price declines that accompanied the initial round of rate hikes.
But headline yields can be misleading. They don’t account for real-world friction like management fees and especially taxes on distributions. If you hold the wrong type of bond fund in a taxable account, your after-tax return can end up significantly lower than what its 30-day SEC yield suggests.
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This is because bonds are taxed differently depending on their issuer. For instance, investors who own U.S. Treasury bonds are exempt from state and local taxes, but corporate bondholders owe taxes at all levels. That matters a lot if you live in a high-tax state like California or New York.
Municipal bonds help solve this problem. “These are debt instruments issued by states, cities, counties and other governmental entities to finance public projects like roads, bridges and schools,” says Nathan Will, principal and head of municipal credit research at Vanguard.
New investors often overlook municipal bond funds because the yields look lower on paper than those of taxable bond funds with similar credit risk and maturity bands. But that comparison misses the mark.
The more relevant figure is the tax-equivalent yield, which estimates how much a taxable bond would need to yield to match the after-tax income of a municipal bond fund, based on your federal tax bracket and state of residence.
That allows for a cleaner comparison, especially if your tax-sheltered accounts like a Roth IRA or 401(k) are already full and you’re adding more bond exposure in a taxable brokerage account.
Here are seven of the best municipal bond mutual funds and ETFs to buy today:
| Fund | Expense ratio | 30-day SEC yield |
| Vanguard Tax-Exempt Bond ETF (ticker: VTEB) | 0.03% | 3.8% |
| Vanguard Short-Term Tax-Exempt Bond ETF (VTES) | 0.06% | 2.7% |
| iShares National Muni Bond ETF (MUB) | 0.05% | 3.6% |
| Schwab Tax-Free Bond Fund (SWNTX) | 0.38% | 3.7% |
| Vanguard California Long-Term Tax-Exempt Fund Admiral Shares (VCLAX) | 0.09% | 4.1% |
| Fidelity New York Municipal Income Fund (FTFMX) | 0.44% | 3.7% |
| Invesco National AMT-Free Municipal Bond ETF (PZA) | 0.28% | 4.2% |
Vanguard Tax-Exempt Bond ETF (VTEB)
“Municipal bonds are generally a high-quality asset class with a very low historical default rate,” Will explains. “What sets them apart is the combination of strong credit fundamentals and the opportunity to earn tax-exempt income.” For example, Vanguard’s flagship municipal bond ETF, VTEB, is rated “two out of five” on the risk/reward scale. Most of this ETF’s bonds are also rated AA, an indicator of low default risk.
“In the event there is an adverse credit event, it will generally only affect a small part of the portfolio due to the effects of broad diversification and the expertise of a firm’s credit teams,” Will says. VTEB’s portfolio is spread across over 9,800 bonds tracking the S&P National AMT-Free Municipal Bond Index. The ETF pays a 3.8% 30-day SEC yield and, in classic Vanguard fashion, charges a low 0.03% expense ratio.
Vanguard Short-Term Tax-Exempt Bond ETF (VTES)
“For the most part, trying to hand-pick individual municipal bonds can be time-consuming and create additional risk,” says Brandon Clark, director of financial planning at Clark Group Asset Management. “In contrast, a municipal bond fund creates more diversification and lowers the chances of default risk by investing in hundreds or even thousands of high-quality tax-exempt bonds.”
VTES is the lower-risk alternative to VTEB, at a 0.06% expense ratio. It tracks the S&P 0-7 Year National AMT-Free Municipal Bond Index, which holds over 2,900 issues mostly rated AA. However, the average duration of VTES’s portfolio is much shorter, at 2.5 years versus 7.1 years for VTEB. This means the price of VTES is expected to be less sensitive to interest rate changes. VTES pays a 2.7% 30-day SEC yield.
iShares National Muni Bond ETF (MUB)
“Some municipal bonds focus on specific states, offering additional advantages for residents of heavily taxed areas such as California, New York or Illinois,” says Michael Ashley Schulman, chief investment officer at Running Point Capital Advisors. “However, this strategy limits the diversification benefits you’d get from investing in a nationwide municipal bond fund.” If state taxes aren’t a concern, consider MUB.
MUB’s portfolio tracks the ICE AMT-Free US National Municipal Index. It spans more than 5,700 securities mostly rated AA, with an average duration of 7.1 years. As a nationally diversified fund, MUB holds municipal bonds from New York, California, Texas, Illinois, New Jersey, Massachusetts, Washington, Pennsylvania and more. The ETF charges a 0.5% expense ratio and pays a 3.6% 30-day SEC yield.
Schwab Tax-Free Bond Fund (SWNTX)
“Some of the better bond market mutual funds have low expense ratios, no front- or back-end load costs, no 12b-1 marketing fees, performance that closely hug(s) their benchmark (i.e., low tracking error), and steady or consistent inflows over time,” Schulman explains. It’s especially important to avoid load fees and 12b-1 charges because they offer no real benefit to you as the investor.
SWNTX checks most of these boxes. On Charles Schwab’s brokerage platform, this municipal bond fund can be accessed with no minimums or 12b-1 fees. It currently delivers a 3.7% 30-day SEC yield against an average duration of 6.6 years. The fund charges a 0.38% expense ratio, which is reasonable for an actively managed municipal bond fund that doesn’t track a benchmark index.
[READ: 7 Best Treasury ETFs to Buy Now]
Vanguard California Long-Term Tax-Exempt Fund Admiral Shares (VCLAX)
“For our clients in California, we have been adding VCLAX,” Clark says. “With income tax rates for California being so high, this can really add a lot of value by avoiding income tax entirely, both federally and on the state level.” The fine print with VCLAX is that only California residents can receive the full benefit of the 4.1% 30-day SEC yield entirely free from both federal and state taxes.
“Even with lower yields than corporate bonds, the after-tax impact of a California municipal bond fund in some cases can be more advantageous by generating greater after-tax returns,” Clark explains. That being said, the net asset value of VCLAX can be more volatile in response to interest rate changes due to a longer 8.7-year duration. The fund charges a 0.09% expense ratio.
Fidelity New York Municipal Income Fund (FTFMX)
Aside from California, New York has one of the highest personal income tax rates, so it is common to see New York-specific municipal bond funds from asset managers. For this role, Fidelity offers FTFMX, which for residents of New York state pays a 3.7% 30-day SEC yield exempt from both federal and state income taxes. On Fidelity’s brokerage platform, FTFMX can be purchased with no transaction fees.
Just over half of FTFMX’s portfolio is allocated to revenue bonds, which are backed by specific projects or revenue streams like toll roads or hospitals, while about 40% is in general obligation bonds backed by the issuer’s taxing power. Most holdings are rated AA, but the fund’s 8.4-year duration makes it more sensitive to interest rate changes. FTFMX charges a 0.44% expense ratio.
Invesco National AMT-Free Municipal Bond ETF (PZA)
State-specific funds aren’t the only specialized options when it comes to municipal bonds. Another option is alternative minimum tax (AMT)-free municipal bond funds. The AMT is a separate tax system that runs alongside regular federal income tax. It is designed to ensure that high-income earners pay a minimum amount of tax, even after deductions and exemptions. For this category, Invesco offers PZA.
“PZA stands apart from many of its peers given it invests in investment-grade municipal bonds 15-plus years from maturity,” says Jason Bloom, head of fixed income and alternatives ETF product strategy at Invesco. “In the investment-grade municipal bond market, investors are usually compensated with greater yields as they invest in longer-maturity bonds.” The ETF pays a 4.2% 30-day SEC yield.
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7 of the Best Tax-Free Municipal Bond Funds originally appeared on usnews.com
Update 08/08/25: This story was previously published at an earlier date and has been updated with new information.
