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The 3 Best Municipal Bond ETFs (1 From Vanguard) for 2025

Last Updated: July 17, 2023 4 Comments – 2 min. read

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.

Disclosure:  Some of the links on this page are referral links. At no additional cost to you, if you choose to make a purchase or sign up for a service after clicking through those links, I may receive a small commission. This allows me to continue producing high-quality content on this site and pays for the occasional cup of coffee. I have first-hand experience with every product or service I recommend, and I recommend them because I genuinely believe they are useful, not because of the commission I may get. Read more here.

Contents

  • Video
  • Introduction – Why Municipal Bonds?
  • The 3 Best Municipal Bond ETFs
    • MUB – iShares National AMT-Free Muni Bond ETF
    • VTEB – Vanguard Tax-Exempt Bond Index ETF
    • SHM – SPDR Barclays Short Term Municipal Bond
  • Where To Buy These Municipal Bond ETFs

Video

Prefer video? Watch it here:

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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Interested in more Lazy Portfolios? See the full list here.

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 research report. 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. Hypothetical examples used, such as historical backtests, do not reflect any specific investments, are for illustrative 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.

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About John Williamson, APMA®

Analytical data nerd, investing enthusiast, fintech consultant, Boglehead, and Oxford comma advocate. I'm not a big fan of social media, but you can find me on LinkedIn and Reddit.

Reader Interactions

Comments

  1. Zaid C says

    June 9, 2024 at 9:34 pm

    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?

    Reply
    • John Williamson, APMA® says

      June 10, 2024 at 3:37 pm

      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.

      Reply
  2. Saša Zdjelar says

    December 22, 2023 at 2:08 pm

    Do you have a pie for this in M1 or how would your structure one?

    Reply
    • John Williamson, APMA® says

      December 22, 2023 at 9:32 pm

      I’d just pick one of the 3 ETFs discussed. It’s not a pie.

      Reply

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