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 2025.
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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.
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Are you nearing or in retirement? Use my link here to get a free holistic financial plan and to take advantage of 25% exclusive savings on financial planning and wealth management services from fiduciary advisors at Retirable to manage your savings, spend smarter, and navigate key decisions.
Thanks for the review. As someone in the highest federal income tax bracket, would it be okay to hold only VTEB as you start to approach retirement? I ask since I notice you mentioning your plans to include VGIT and SCHP in your own portfolio near retirement but those are both subject to federal income tax, right?
Hey Zaid, I can’t provide personalized advice here but I personally would never solely use municipal bonds as my entire fixed income allocation due to what I described here about them not offering the same behavior/protection during stock market downturns. Yes, the treasuries would be taxed.
Do you have a pie for this in M1 or how would your structure one?
I’d just pick one of the 3 ETFs discussed. It’s not a pie.