Municipal bonds offer tax-free interest and are beneficial for very high income earners. Here we'll look at the best municipal bond ETFs for 2023.
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Introduction – 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.
Below we'll look at the best municipal bond ETFs.
The 3 Best Municipal Bond ETFs
Below are the 3 best municipal bond ETFs, sorted by greatest to least AUM.
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%.
Where To Buy These Municipal Bond ETFs
All the above municipal bond ETFs should be available at any major broker. My choice is M1 Finance. M1 has zero trade commissions and zero account fees, and offers fractional shares, dynamic rebalancing, intuitive pie visualization, and a sleek, user-friendly interface and mobile app. I wrote a comprehensive review of M1 Finance here.
Are you nearing or in retirement? Use my link here to get a free holistic financial plan from fiduciary advisors at Retirable to manage your savings, spend smarter, and navigate key decisions.
Don't want to do all this investing stuff yourself or feel overwhelmed? Check out my flat-fee-only fiduciary friends over at Advisor.com.
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Disclaimer: While I love diving into investing-related data and playing around with backtests, this is not financial advice, investing advice, or tax advice. The information on this website is for informational, educational, and entertainment purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. I always attempt to ensure the accuracy of information presented but that accuracy cannot be guaranteed. Do your own due diligence. I mention M1 Finance a lot around here. M1 does not provide investment advice, and this is not an offer or solicitation of an offer, or advice to buy or sell any security, and you are encouraged to consult your personal investment, legal, and tax advisors. All examples above are hypothetical, do not reflect any specific investments, are for informational purposes only, and should not be considered an offer to buy or sell any products. All investing involves risk, including the risk of losing the money you invest. Past performance does not guarantee future results. Opinions are my own and do not represent those of other parties mentioned. Read my lengthier disclaimer here.
Are you nearing or in retirement? Use my link here to get a free holistic financial plan from fiduciary advisors at Retirable to manage your savings, spend smarter, and navigate key decisions.
Don't want to do all this investing stuff yourself or feel overwhelmed? Check out my flat-fee-only fiduciary friends over at Advisor.com.
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