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Municipal Bond ETFs: Which Muni ETFs are Right for You?

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The expanding number of exchange-traded funds, or ETFs, has provided investors with a multitude of ways to invest in municipal bonds. Today, investors can choose from over 30 municipal bond ETFs that slice and dice this popular market segment into eleven different categories. Municipal bond ETFs offer investors income that is tax-free on the federal level and possibly the state level as well. Before investing, find out if municipal bonds are right for you.

Below is the list of all municipal bond ETFs, sorted by category:

Broad-Based Municipal Bond Index Funds

These funds provide broad exposure to the muni asset class. MUB is the “big daddy” of municipal bond ETFs, with the highest trading volume and largest assets under management. It tracks the S&P National AMT-Free Municipal Bond Index, which measures the performance of the investment-grade municipal bond segment and encompasses all maturities (short, intermediate, and long). Compared to MUB, SPDR Lehman Municipal Bond ETF (TFI) tracks a different index is smaller, but is similar in terms of its fees, portfolio structure, and performance characteristics.

  • iShares S&P National Municipal Bond Index Fund (MUB)
  • SPDR Lehman Municipal Bond ETF (TFI)

Short-Term Municipal Bond ETFs

Short-term municipal bonds, like all short-term bonds, offer lower yields than longer-term issues, but they also have less risk – making them appropriate for more conservative investors or those with shorter time frames until they need access to their investment capital.

  • Market Vectors Short Municipal Index ETF (SMB)
  • S&P Short-Term National AMT-Free Municipal Bond Fund (SUB)
  • PIMCO Short Term Municipal Bond Strategy Fund (SMMU)
  • SPDR Lehman Short Term Municipal Bond ETF (SHM)
  • Market Vectors Short High-Yield Municipal Index ETF (SHYD)

Intermediate-Term Municipal Bond ETFs

Intermediate-term municipal bonds, which are those that mature within two to ten years, are somewhat more sensitive to movements in prevailing interest rates, and are therefore considered to be higher-risk than shorter-term issues. The trade-off? You’ll be compensated for this added risk through higher yields.

  • Market Vectors Intermediate Municipal Index ETF (ITM)
  • Columbia Intermediate Municipal Bond ETF (GMMB)
  • PIMCO Intermediate Municipal Bond Strategy Fund (MUNI)

Long-Term Municipal Bond ETFs

Long-term bonds, which are those that mature in ten years or more, offer higher income than short- or interemediate-term bonds, but they also have substantially higher interest-rate risk - a major consideration when long-term Treasury yields are rising.

  • Market Vectors AMT-Free Long Municipal Index ETF (MLN)

Target Maturity Municipal Bond ETFs

Target-maturity funds are those that mature on a specific date, providing the benefits of laddering and the fund format in a single investment. Target-maturity funds also provide investors with a known date at which their principal will be returned.

  • iShares 2014 S&P AMT-Free Municipal Bond Series ETF (MUAC)
  • iShares 2015 S&P AMT-Free Municipal Bond Series ETF (MUAD)
  • iShares 2016 S&P AMT-Free Municipal Bond Series ETF (MUAE)
  • iShares 2017 S&P AMT-Free Municipal Bond Series ETF (MUAF)
  • iShares 2018 S&P AMT-Free Municipal Bond Series ETF (MUAG)
  • iShares 2019 S&P AMT-Free Municipal Bond Series ETF (MUAH)

High Yield Municipal Bond ETFs

High yield municipal bonds, like high yield corporate bonds, offer investors higher income than other types of muni bonds. But this yield comes with a price: these bonds are issued by municipalities with lower credit ratings. As a result, their principal can experience larger short-term declines than the higher-quality segments of the market. So enjoy the yield if you have a long-term horizon, but make sure you’re aware of the risks before you invest.

  • SPDR Nuveen S&P High Yield Municipal Bond ETF (HYMB)
  • Market Vectors High-Yield Municipal Bond Index ETF (HYD)

Insured Municipal Bond ETFs

Insured municipal bonds are bond issues that carry private insurance that guarantees the bond’s principal and interest will be paid in the event that the issuer cannot do so. As a result, they are one of the lower-risk (and lower-yielding) segments of the market. Keep in mind though, these bonds are only insured against default, and not against the standard price fluctuations that occur between issuance and maturity. Learn more about insured municipal bonds.

  • Insured National Municipal Bond Portfolio ETF (PZA)

Pre-Refunded Municipal Bond ETFs

Pre-refunded bonds are those that have been called by the issuer and whose interest and principal payments are being made from the interest and principal payments from a U.S. Treasury security held by the original issuer. Pre-refunded bonds offer the credit quality of federal government securities with the tax advantages of municipal bonds. As a result, they are popular choice among conservative investors who are looking for a safe, short-term, and tax-free investment, although this is offset by lower yields. Learn more about pre-refunded municipal bonds.

  • Market Vectors Pre-Refunded Municipal Index ETF (PRB)

Build America Bond ETFs

Build America Bonds, or BABs, are municipal bonds issued from April, 2009 through December, 2010 as part of the American Recovery and Reinvestment Act. Like traditional municipal bonds, Build America Bonds are issued by states, counties, and municipalities. However, unlike traditional munis, the income is fully taxable to investors. While their taxable nature means that BABs aren’t a particularly attractive option for typical municipal bond investors – those in high tax brackets seeking to avoid taxation on their investment income – they have attracted investors via their higher yields and ability to enhance portfolio diversification.

  • Build America Bond Portfolio ETF (BAB)
  • SPDR Nuveen Barclays Capital Build America Bond ETF (BABS)
  • PIMCO Build America Bond Strategy Fund (BABZ)

Variable Rate Demand Obligations ETF

Variable rate demand obligations, or VRDOs, are municipal bonds with interest rates that can vary. If rates go up, so will the rate on the bond – a positive for investors. If rates fall, the investor can “put” the bond back to the issuer, or in other words, force the issuer to buy back the bond. The trade-off for these features is that VRDOs typically have lower yields than plain-vanilla municipal bonds.

  • VRDO Tax-Free Weekly Portfolio ETF (PVI)

Closed-end Municipal Bond Fund of Funds

The one fund in this category, XMPT, invests in a basket of closed-end municipal bond funds. The fund is highly diversified, but it is also small and thinly traded, and as of March, 2013 was saddled with the highest annual fee among all fixed-income ETFs.

  • Market Vectors CEF Municipal Income ETF (XMPT)

State-Specific Municipal Bond ETFs

Single-state muni funds provide investors with income that is tax-free on both the federal and state levels. Keep in mind, however, concentrating a portfolio within a single state is a higher-risk proposition than a more diversified approach.

  • SPDR Lehman California Municipal Bond ETF (CXA)
  • Insured CA Municipal Bond Portfolio ETF (PWZ)
  • iShares S&P California Municipal Bond Fund (CMF)
  • Insured NY Municipal Bond Portfolio ETF (PZT)
  • iShares S&P New York Municipal Bond Fund (NYF)
  • SPDR Lehman New York Municipal Bond ETF (INY)

Disclaimer: The information on this site is provided for discussion purposes only, and should not be construed as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities. Always consult an investment advisor and tax professional before you invest.

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