Municipal bonds offer tax-free interest and are beneficial for very high income earners. Here we’ll look at the best municipal bond ETFs.

// TIMESTAMPS:

00:00 - Intro - Why Municipal Bonds?
01:09 - MUB
01:34 - VTEB
01:57 - SHM
02:25 - Outro

// SUMMARY:

Why Municipal Bonds?

Municipal bonds, or munis, are bonds issued to investors by states and municipalities to pay for infrastructure and operating expenses. Muni bonds are popular among high income earners because their interest payments are exempt from federal and some state taxes. Public-purpose munis are specifically free from the alternative minimum tax, called “AMT-free.”

Municipal bonds are more correlated with stocks than treasury bonds, but less correlated than corporate bonds. Muni bonds also have a much lower default rate than corporate bonds.

If yield is a concern, as with using bond interest as income, you can easily see if muni bonds might make sense for you. Simply compare the after-tax yield of an investment-grade bond to the tax-free yield of the muni bond. For example, if a taxable bond is paying you a 3% coupon and your tax rate on that income is 25%, the after-tax yield is 2.25%. If the tax-free muni bond is paying more than 2.25%, it is probably the better choice, particularly if we’re talking about junk bonds.

Let's check out the best municipal bond ETFs.

MUB – iShares National AMT-Free Muni Bond ETF

The iShares National AMT-Free Muni Bond ETF (MUB) is the most popular municipal bond ETF with nearly $18 billion in assets. The fund seeks to track the S&P National AMT-Free Municipal Bond Index. This ETF is broadly diversified with over 4,400 individual holdings. It has a weighted average maturity of 5.4 years and an expense ratio of 0.07%.

VTEB – Vanguard Tax-Exempt Bond Index ETF

A slightly more affordable way to track the same index as MUB above is with the Vanguard Tax-Exempt Bond Index ETF (VTEB), which has an expense ratio of 0.05%, making it the most affordable on the list. While still highly liquid, VTEB could be considered less liquid than MUB with about half the AUM.

SHM – SPDR Barclays Short Term Municipal Bond

The SPDR Barclays Short Term Municipal Bond (SHM) only targets short-term municipal bonds, with a weighted average maturity of 2.9 years. As such, investors can expect lower volatility but also lower expected returns than the ETFs above. SHM seeks to track the Barclays Capital Managed Money Municipal Short Term Index and has over $4 billion in assets and an expense ratio of 0.20%.

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