Municipal bonds offer tax-free interest and are beneficial for very high income earners. Here we’ll look at the best municipal bond ETFs.
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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.
Below we’ll look at the best municipal bond ETFs.
The 3 Best Treasury 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 0.06%. 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 are available at 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.
Disclaimer: While I love diving into investing-related data and playing around with backtests, I am in no way a certified expert. I have no formal financial education. I am not a financial advisor, portfolio manager, or accountant. This is not financial advice, investing advice, or tax advice. The information on this website is for informational and recreational purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or transact in any of the products mentioned. Do your own due diligence. Read my lengthier disclaimer here.