The largest fixed-income exchange-traded fund, or ETF, trading on the U.S. market today is the Vanguard Total Bond Market ETF (ticker: BND).
With $157 billion in assets under management, the fund has attracted investors not only because of Vanguard’s reputation but also because of its rock-bottom 0.03% expense ratio. In exchange for these low fees, investors receive a broadly diversified portfolio of more than 11,000 securities spanning U.S. Treasurys, mortgage-backed securities and investment-grade corporate bonds.
[Sign up for stock news with our Invested newsletter.]
One aspect that many novice investors overlook, however, is tax efficiency. BND currently pays a respectable 4.5% 30-day SEC yield through monthly distributions, but each of those is generally a taxable event unless the ETF is held inside a tax-advantaged account such as a Roth IRA.
According to Vanguard, BND generated a 3.6% annualized total return over the trailing three years. However, after accounting for taxes paid on those distributions, Vanguard estimates the average annualized after-tax return fell to just 2.1%.
The reason comes down to how different types of bonds are taxed. Treasury securities generally enjoy exemptions from state and local income taxes, but corporate bond interest is typically taxed as ordinary income at an investor’s marginal tax rate. BND’s portfolio holds a large chunk of the latter.
For investors in higher tax brackets, that can create substantial tax drag and meaningfully reduce after-tax returns. As a result, a bond fund’s headline yield may overstate the income investors ultimately keep.
One way around this issue is to invest in a category of bonds that is largely absent from aggregate bond funds such as BND: municipal bonds. “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.
Municipal bonds are issued by states, cities, counties and other local government entities. Some are general obligation bonds backed by the issuer’s taxing authority, while others are revenue bonds supported by cash flows generated from projects such as toll roads, water utilities, airports or hospitals.
Like corporate bonds, municipal bonds come with varying levels of credit quality. Most municipal bond funds focus on investment-grade issuers, rated BBB or higher. However, lower-rated municipal bonds also exist and generally offer higher yields in exchange for taking on additional risk.
Municipal bonds can be purchased individually, but they are also commonly packaged into mutual funds and ETFs that provide diversification, professional management and monthly income distributions.
Here are seven of the best tax-free municipal bond funds to buy today:
| Fund | Expense Ratio | 30-Day SEC Yield |
| Vanguard Tax-Exempt Bond ETF (VTEB) | 0.03% | 3.5% |
| Vanguard Short-Term Tax-Exempt Bond ETF (VTES) | 0.05% | 2.7% |
| Schwab Municipal Bond ETF (SCMB) | 0.03% | 3.5% |
| iShares National Muni Bond ETF (MUB) | 0.05% | 3.4% |
| iShares New York Muni Bond ETF (NYF) | 0.09% | 3.3% |
| iShares California Muni Bond ETF (CMF) | 0.08% | 3.1% |
| Franklin Municipal High Yield ETF (FTMH) | 0.35% | 4.8% |
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.” While BBB is the minimum rating to be considered investment-grade, most diversified municipal bond funds like VTEB will overweight A- and AA-rated securities.
Accordingly, Vanguard scores VTEB a two out of five on its risk-reward scale. Barring rising-interest-rate years like 2022, when VTEB’s higher seven-year average duration worked against it, this ETF has historically demonstrated low volatility. After deducting the same 0.03% expense ratio as BND, VTEB currently pays a 3.5% 30-day SEC yield that is exempt from both federal income tax and the alternative minimum tax.
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. For example, VTES spans about 3,200 municipal bonds across various states with about 60% of the portfolio allocated to AA-rated securities. Vanguard also scores this ETF a two out of five on its risk-reward scale.
However, VTES is generally considered more resilient than VTEB owing to its shorter duration of just 2.6 years. This means the ETF stands to gain less in net asset value appreciation when interest rates fall, but conversely will be hurt less when rates rise. For investors with a shorter time horizon, this feature may be useful. VTES charges a 0.05% expense ratio and pays a 2.7% 30-day SEC yield.
Schwab Municipal Bond ETF (SCMB)
“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 The Clark Group Asset Management. Unlike stocks, most bonds trade in an over-the-counter market where pricing is less transparent and liquidity can vary significantly. Opting for municipal bond exposure via a fund mitigates these risks.
SCMB is a good example. For a low 0.03% expense ratio, it passively tracks a portfolio of about 6,700 municipal bonds represented by the ICE AMT-Free Core U.S. National Municipal Index. It has similar interest rate sensitivity as VTEB with a 6.7-year duration and pays a 3.5% 30-day SEC yield. The fund has recorded a fairly low 5.4% three-year standard deviation, a measure of historical volatility.
[Read: 9 of the Best Bond ETFs to Buy for 2026]
iShares National Muni Bond ETF (MUB)
“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,” Clark explains. When investors buy a bond, they are effectively lending money to an issuer. Thus, spreading those loans across many states, cities, agencies and projects can reduce the impact if any single borrower runs into financial trouble.
MUB is another municipal bond fund that prioritizes diversification. It spans about 6,700 holdings, paying a 3.4% 30-day SEC yield after deducting a 0.05% expense ratio. However, iShares estimates MUB has a tax-equivalent yield of 5.7%. In other words, a comparable taxable bond fund would need to yield at least 5.7% to match MUB’s income for an investor in the highest federal tax bracket.
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, partner at Cerity Partners. “However, this strategy limits the diversification benefits you’d get from investing in a nationwide municipal bond fund.” Still, this trade-off may be acceptable for high-income investors.
For a 0.09% expense ratio, NYF holds 880 municipal bonds issued by various transportation, bridge and tunnel, water utility, and port authorities in New York. The fund maintains high credit quality with around 58% of its holdings rated AA. Investors receive a 3.3% 30-day SEC yield, but iShares estimates a tax-equivalent yield of 6.9% assuming the highest state and federal income tax brackets.
iShares California Muni Bond ETF (CMF)
“With income tax rates for California being so high, some municipal bond funds can add a lot of value by avoiding income tax entirely, both federally and on the state level,” Clark says. California investors may find CMF useful. This municipal bond fund holds 81% of its investments in AA-rated bonds, with issuers such as the University of California, Bay Area Toll Authority and the California State Public Works Board represented.
For California residents, the 3.1% 30-day SEC yield paid by CMF is exempt from both federal and state income taxes. Assuming the highest federal and state income tax bracket, iShares estimates that CMF’s tax-equivalent yield could be as high as 6.8%. However, investors lose some diversification as CMF’s portfolio of about 1,600 bonds is concentrated in a single state. The fund charges a 0.08% expense ratio.
Franklin Municipal High Yield ETF (FTMH)
Many municipal bond funds concentrate heavily in AA-rated securities. While that can improve safety and reduce default risk, it also limits income potential. Income-focused investors seeking tax-efficient yield may therefore find FTMH appealing. Unlike the previous funds, FTMH is actively managed rather than index based. The portfolio management team uses fundamental research to select bonds.
As a result, FTMH can allocate to non-investment-grade municipal debt, including bonds rated BB and below. In exchange for taking on additional credit risk, the fund currently pays a higher 4.8% 30-day SEC yield, which Franklin Templeton estimates is equivalent to a taxabile yield of 8.1%. However, the use of active management results in higher fees, with FTMH charging a 0.35% expense ratio.
More from U.S. News
Donald Trump Stocks: 8 Stocks Owned by the President
7 of the Best Vanguard ETFs for Retirees
8 High-Return, Low-Risk Investments for Retirement
7 of the Best Tax-Free Municipal Bond Funds originally appeared on usnews.com
Update 06/08/26: This story was published at an earlier date and has been updated with new information.
