If tax efficiency is a top priority, there are quite a few ways to shield more of your investment gains from Uncle Sam.
Asset location should come first. Americans have access to several tax-sheltered accounts, including workplace 401(k) plans, Roth IRAs and health savings accounts (HSAs). The details vary between them, but in general, contributions can grow tax-deferred, and qualified withdrawals can be tax-exempt.
That said, annual contribution limits mean diligent savers often max these out quickly. When that happens, and your only option is a taxable brokerage account, the focus shifts from asset location to asset selection. For this, some investments are more naturally tax efficient than others.
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For example, Warren Buffett’s conglomerate, Berkshire Hathaway Inc. (ticker: BRK.B) pays no dividends, allowing investors to defer capital gains taxes until they sell. Similarly, the Invesco Nasdaq 100 ETF (QQQM) has a small 0.5% 30-day SEC yield because its underlying index favors large growth companies that reinvest profits rather than pay dividends.
Neither of these, however, are low-risk options. Berkshire carries single-stock and succession risk, while QQQM is heavily concentrated in the technology sector.
If your goal is to reduce volatility while maintaining tax efficiency, consider a municipal bond fund instead. “These are debt instruments issued by states, cities, counties and other government entities to finance public projects like roads, bridges and schools,” says Nathan Will, principal and head of municipal credit research at Vanguard.
Unlike corporate bonds or Treasurys, most municipal bond funds pay income that’s exempt from federal income tax, and certain variants may also be exempt from state or alternative minimum tax. While under the radar at times, they continue to be attractive investments for high-net-worth investors.
“One of the dominant themes this year for municipal bonds has been primary market issuance, which is poised to set another record in 2025,” says Tony Kelly, co-founder of BondBloxx. “Supply is expected to moderate in November and December, which could result in increased competition for quality bonds and lower yields.”
Here are seven of the best municipal bond mutual funds to buy today:
| Fund | Expense ratio | 30-day SEC yield |
| Vanguard Tax-Exempt Bond Index Fund Admiral Shares (VTEAX) | 0.07% | 3.4% |
| Vanguard Short-Term Tax-Exempt Bond ETF (VTES) | 0.06% | 2.5% |
| iShares National Muni Bond ETF (MUB) | 0.05% | 3.3% |
| iShares New York Muni Bond ETF (NYF) | 0.09% | 3.3% |
| Vanguard California Long-Term Tax-Exempt Fund Admiral Shares (VCLAX) | 0.09% | 3.6% |
| Schwab Tax-Free Bond Fund (SWNTX) | 0.38% | 3.3% |
| BondBloxx IR&M Tax-Aware Short Duration ETF (TAXX) | 0.35% | 3.1% |
Vanguard Tax-Exempt Bond Index Fund Admiral Shares (VTEAX)
“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, the average credit quality in VTEAX’s municipal bond portfolio is rated AA and overall generates a federal-income-tax-exempt yield of 3.4% on a 30-day SEC basis.
VTEAX tracks the S&P National AMT-Free Municipal Bond Index, which is diversified across over 9,800 holdings with an average duration of 7.2 years. The fund charges a 0.07% expense ratio and requires a $3,000 minimum investment. However, investors can avoid that by opting for its ETF counterpart, the Vanguard Tax-Exempt Bond ETF (VTEB), which charges an even lower 0.03%.
Vanguard Short-Term Tax-Exempt Bond ETF (VTES)
“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. Some municipal bond funds like VTES also provide protection from rising interest rates due to their low duration. With a duration of just 2.6 years, the price of VTES is less sensitive to rate changes.
Compared to VTEAX, VTES is more suitable for investors with a shorter time horizon. This ETF sits between traditional municipal bond funds and municipal money market funds on the risk and return scale. It charges a 0.06% expense ratio and pays a 2.5% 30-day SEC yield exempt from federal income tax. However, Vanguard does not currently offer a mutual fund version of VTES.
iShares National Muni Bond ETF (MUB)
“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.”
Maximum diversification in the municipal bond segment can be achieved by investing in MUB. This ETF tracks the ICE AMT-Free US National Municipal Index, which spans over 5,900 holdings with an average duration of 6.3 years. After accounting for a minimal 0.05% expense ratio, investors can expect a 3.3% 30-day SEC yield. It is a highly liquid ETF thanks to a minuscule 0.01% 30-day median bid-ask spread.
iShares New York Muni Bond ETF (NYF)
“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 this trade-off is acceptable, consider NYF.
This ETF tracks the ICE AMT-Free New York Plus Municipal Index. For New York residents, the 3.3% 30-day SEC yield paid by NYF is free from federal and state income taxes. However, NYF is less diversified than MUB, with just over 700 holdings all from a single region. It has intermediate interest-rate sensitivity, with a 6.2-year average duration, and it charges a 0.09% expense ratio.
[READ: 5 Great Fixed-Income Funds to Buy for 2025]
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.” For these investors, the 3.6% 30-day SEC yield paid by VCLAX can easily surpass the after-tax yield from a taxable bond fund of a comparable maturity.
However, VCLAX has some features that make it less accessible to new or less experienced investors. First is a $50,000 minimum investment, which is significantly higher than the usual $3,000 required by Vanguard funds. There’s also the matter of a high 8.4-year duration, which makes the fund more volatile when interest rates change. However, VCLAX remains fairly affordable, thanks to a 0.09% expense ratio.
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. Strong competition in this space has forced major fund managers to make their offerings more accessible and cost effective.
SWNTX is a good example. This actively managed municipal bond fund does not track an index. It offers a more concentrated portfolio of just over 400 holdings selected via fundamental analysis of credit and maturity profiles. Investors can currently expect a 3.3% 30-day SEC yield after accounting for a 0.38% expense ratio. SWNTX also has no minimum required investment, unlike most Vanguard funds.
BondBloxx IR&M Tax-Aware Short Duration ETF (TAXX)
“Tax-aware strategies expand the investment universe beyond municipal bonds as, sometimes, paying taxes can actually lead to better portfolio outcomes,” Kelly explains. “TAXX is designed to optimize allocations between municipal and taxable bonds, with the goal of maximizing after-tax income for investors.” At least 50% of the portfolio is held in municipal bonds, with the rest in short-maturity bonds.
According to BondBloxx, TAX currently pays a 3.1% 30-day SEC yield but has an estimated tax equivalent yield of 5.1%. This metric represents the theoretical yield that a taxable bond fund would need to match the yield on a comparable tax-exempt bond fund. TAXX charges a 0.35% expense ratio, and is particularly suitable for investors with a shorter time horizon thanks to its low 1.7-year average duration.
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7 of the Best Tax-Free Municipal Bond Funds originally appeared on usnews.com
Update 10/30/25: This story was previously published at an earlier date and has been updated with new information.
