Earning more income from a bond fund is usually a matter of dialing up credit risk. By lending to issuers with lower credit ratings, investors receive higher yields as compensation for accepting a greater probability that coupons may not be paid on time or, in extreme cases, that principal may not be fully repaid. A diversified bond fund can further mitigate this risk.
Beyond credit quality, however, investors chasing higher bond yields can easily overlook tax efficiency. Consider the iShares Broad USD Investment Grade Corporate Bond ETF (ticker: USIG), which currently pays a 5.4% 30-day SEC yield. In contrast, the iShares U.S. Treasury Bond ETF (GOVT) yields a lower 4.5%, reflecting the substantially lower credit risk of U.S. government debt.
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Over the trailing five years, iShares calculates that USIG produced a -0.02% annualized total return assuming distributions were reinvested. However, after accounting for taxes on distributions and sales of fund shares, its average annual return falls to -0.7%. For investors in higher tax brackets, the difference can materially alter the appeal of a higher-yielding bond fund.
Corporate bond ETFs can be particularly tax inefficient because the interest generated by their underlying securities is generally taxed as ordinary income rather than at the preferential rates available for qualified dividends and long-term capital gains. Treasury ETFs such as GOVT have an advantage here because Treasury interest is generally exempt from state and local income taxes.
Municipal bonds can take tax efficiency considerably further. “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.
These securities come in two forms. General obligation bonds are backed primarily by an issuer’s taxing power, while revenue bonds are supported by income generated from a particular project or source, such as a toll road, airport, hospital or utility system.
Their primary attraction is tax treatment: Interest is generally exempt from federal income tax, while qualifying bonds may also avoid the alternative minimum tax (AMT) and, when purchased by residents of the issuing state, potentially state and local income taxes.
Investors can buy individual municipal bonds, but ETFs make diversification considerably easier. Municipal bond ETFs add the convenience of intraday trading at bid and ask prices, and distribute income monthly rather than through the semi-annual coupons common to individual bonds.
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% | 3.7% |
| Schwab Municipal Bond ETF (SCMB) | 0.03% | 3.7% |
| iShares New York Muni Bond ETF (NYF) | 0.09% | 3.5% |
| iShares California Muni Bond ETF (CMF) | 0.08% | 3.3% |
| Invesco National AMT-Free Municipal Bond ETF (PZA) | 0.28% | 3.9% |
| State Street SPDR Nuveen ICE High Yield Municipal Bond ETF (HYMB) | 0.35% | 4.8% |
| Xtrackers Municipal Infrastructure Revenue Bond Active ETF (RVNU) | 0.15% | 4.3% |
Vanguard Tax-Exempt Bond ETF (VTEB)
“Municipal bonds are generally a high-quality asset class with a very low historical default rate,” Will explains. “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.” Investors can see this in practice with VTEB, which holds more than 10,000 municipal bonds with 61% rated AA.
VTEB charges a low 0.03% expense ratio, and currently offers a 3.7% 30-day SEC yield with a monthly distribution cadence. Investors looking to reduce interest rate sensitivity further can opt for its lower-risk, shorter-maturity counterpart, the Vanguard Short-Term Tax-Exempt Bond ETF (VTES). This ETF charges a slightly higher 0.05% expense ratio and pays a lower 2.8% 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. “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.”
SCMB charges the same low 0.03% expense ratio as VTEB and tracks the ICE AMT-Free Core U.S. National Municipal Index, which spans over 6,900 holdings. The portfolio has intermediate interest rate sensitivity, with an effective duration of 7.1 years, and currently offers a 3.7% 30-day SEC yield. SCMB is also well capitalized, with just over $4 billion in assets under management.
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.” Most asset managers will offer state-specific municipal bond funds.
For example, iShares offers NYF, which tracks the ICE AMT-Free New York Plus Municipal Index. The portfolio holds just under 900 municipal bonds and currently offers a 3.5% 30-day SEC yield. However, iShares estimates a much higher 7.2% tax-equivalent yield when assuming the highest applicable federal and New York state income tax rates. NYF charges a 0.09% expense ratio.
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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. For California investors, iShares offers CMF at a 0.08% expense ratio, tracking the ICE AMT-Free California Municipal Index. The ETF currently offers a 3.3% 30-day SEC yield and a much higher 7.1% tax-equivalent SEC yield.
CMF invests exclusively in California municipal debt, with roughly 82% of the portfolio rated AA. School districts account for nearly a quarter of issuers, while state tax-backed and utility bonds each represent another fifth. Investors can expect intermediate interest rate sensitivity with an effective duration of 6.4 years. The ETF has a track record dating back to 2007 and $4.6 billion in assets under management.
Invesco National AMT-Free Municipal Bond ETF (PZA)
The alternative minimum tax is a parallel federal tax system designed to ensure that higher-income taxpayers cannot use deductions to reduce their tax liability beyond certain levels. PZA makes AMT-free exposure part of its mandate, charging a 0.28% expense ratio. Unlike the preceding municipal bond ETFs, however, it has more interest rate risk with a longer effective duration of 9.8 years.
“PZA has nearly two decades of live history and has attracted more than $1 billion in net inflows year to date, making it one of Invesco’s most in-demand fixed income ETFs this year,” says Jason Bloom, head of fixed-income ETF product strategy at Invesco. “PZA’s current 30-day SEC yield of 3.9% equates to an estimated tax-equivalent yield of approximately 6.6% for investors in the highest federal tax bracket.”
State Street SPDR Nuveen ICE High Yield Municipal Bond ETF (HYMB)
“HYMB boasts a 30-day SEC yield of 4.8%,” says Matthew Bartolini, managing director and global head of research strategists at State Street Investment Management. “However, on a tax-equivalent basis, that yield is around 8.2%.” HYMB achieves this greater income potential by sacrificing some credit quality, with the ability to allocate its portfolio to below-investment-grade and unrated municipal bonds.
Below-investment-grade bonds are rated below BBB and carry greater default risk, while unrated bonds have not received a credit rating from a major ratings agency. Investors generally demand higher yields to compensate for that uncertainty. However, HYMB mitigates some issuer-specific risk through broad diversification across more than 1,900 holdings. The ETF charges a 0.35% expense ratio.
Xtrackers Municipal Infrastructure Revenue Bond Active ETF (RVNU)
Some municipal bond ETFs allow investors to take a more targeted approach to their exposure. RVNU, for example, actively seeks revenue bonds tied to municipal infrastructure projects. Unlike general obligation bonds backed primarily by an issuer’s taxing authority, revenue bonds are repaid from income generated by a specific project or service, making them a common financing tool for infrastructure.
That focus distinguishes RVNU from broader municipal bond funds that typically hold a combination of general obligation and revenue bonds. It can provide a more conservative way than equities to gain exposure to infrastructure development, although investors still face credit and interest rate risk. RVNU currently pays a federal income tax-exempt 4.3% 30-day SEC yield after a 0.15% expense ratio.
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7 of the Best Tax-Free Municipal Bond Funds originally appeared on usnews.com
Update 08/14/26: This story was published at an earlier date and has been updated with new information.
