9 Best Municipal Bond Funds to Buy and Hold

State and local governments are in good shape.

Like other asset classes, the municipal bond market rebounded after the initial sell-off last year because of the pandemic. Amy Magnotta, co-head of discretionary portfolios at Brinker Capital Investments, says state and local governments “are actually in pretty good shape, surprisingly, despite the pandemic,” noting most state revenues were roughly flat in 2020 versus 2019. With President Joe Biden’s stimulus money and infrastructure plan, and the reopening of many states’ economies, the fiscal situation for many state and local governments might be good as they get cash injections. However, she says, with interest rates so low, investors need to be careful what funds they choose. Here are nine muni bond funds to buy.

Vanguard Tax-Exempt Bond ETF (ticker: VTEB)

Todd Rosenbluth, director of ETF and mutual fund research at CFRA, says exchange-traded fund VTEB is a good place for muni bond investors to start when building this part of their portfolio. The fund tracks the S&P Municipal Bond Index, which is made of investment-grade issues and diversified across states. VTEB’s annual cost is 0.06%, which amounts to $6 for every $10,000 invested, one of the lowest among its peers. The fund is free from both federal income tax from the alternative minimum tax. The yield is 2%. “It’s a great core part of the portfolio,” Rosenbluth says.

Baird Short-Term Municipal Bond Fund (BTMIX)

The municipal bond universe can be an inefficient asset class due to its large number of issuers, says Steven Saunders, director and portfolio advisor at Round Table Wealth Management, so his firm prefers to use actively managed funds where the managers can find relative value through security selection and yield-curve positioning. His pick is BTMIX, which “has demonstrated consistent value-add in these areas, and their short-duration strategy allows for defensive positioning in the event rates continue to rise.” The fund has an annual cost of 0.3% and a yield of 1.5%.

PIMCO National Municipal Intermediate Value Fund (GNMVX)

Mark Mumford, director at Hollow Brook Wealth Management, says his firm looks for municipal bonds strategies that have a strong emphasis on credit quality and issuer diversification. GNMVX tries to limit swings in assets under management which can negatively affect a municipal bond strategy, he adds. The fund has a low annual fee of 0.39% and a yield of 1.67%, with an effective duration of 5.3 years. The fund seeks investment-grade bonds with higher yields using fundamental credit research. “Municipal markets can be inefficient, creating opportunities for experienced teams to find value in a low interest rate environment,” Mumford says.

Northern Intermediate Tax-Exempt Fund (NOITX)

Magnotta says with rates low and a recent pickup in market volatility, she prefers active management and is focusing on investment-grade munis. She chooses NOITX, because she likes that it has an experienced team with a long tenure, holds high-quality issues and has a liquid portfolio. She notes the annual cost of 0.46% is below average. “This is a strategy that long term is a good balance in a portfolio,” Magnotta says. This fund has more than $3 billion in assets under management, and the average credit quality in the fund is A-rated.

Nuveen Dynamic Municipal Opportunities Fund (NDMO)

Elan Hiutin, managing director of investments at Wedbush Securities, likes NDMO, a closed-end fund that invests in other closed-end funds made up of municipal bonds. He says the yield after commission and the premium should be more than 5% after state taxes, as it’s a national muni fund. He says NDMO provides “a steady income that’s above the market, diversification and an ability to circumvent federal taxes.” The fund has no leverage and has nearly $900 million in assets under management. Hiutin says muni bonds are historically very secure, noting since 1970, the 10-year cumulative default rate for investment-grade municipal bonds is 0.1%.

VanEck Vectors High Yield Municipal Index ETF (HYD)

Rosenbluth says one solid choice is HYD. The fund tracks a market-weighted index of high-yield, long-term and tax-exempt muni bonds, and it’s one of the few high-yield muni bond ETFs. “You take on more credit risk, but credit risk in the high-yield space doesn’t necessarily mean speculative grade or junk bonds,” he says, pointing to HYD’s weight to BB-rated bonds — double that of its category. It has significant assets under management of $3.3 billion and a 12-month yield of 4%. “It’s a compelling way to get to be able to get some yield, but not taking on too much risk,” he says.

Nuveen High Yield Municipal Bond Fund (NHMRX)

Daniel Milan, managing partner at Cornerstone Financial Services, says he generally prefers ETFs to actively managed funds, but in the current low interest rate environment, paying for active management makes sense. NHMRX has an annual cost of 0.99%; however, he says the tax-free yield is 5% and the one-year return is 2.5%. This fund has about 60% of its assets in nonrated muni bonds, more than double the rate of its peers, which helps to boost yield, but can also be riskier. Nonrated bonds tend to be smaller credits that don’t trade frequently. Investors who don’t mind extra risk for higher yield might consider this fund.

Nuveen All-American Municipal Bond Fund (FAARX)

President Biden’s infrastructure plan could help states repair roads and tackle other big projects. Investors thinking about an infrastructure-investment theme could consider FAARX. “You’re diversifying yourself coast to coast, no matter where the infrastructure is going to be,” Milan says. The fund has a 0.5% annual fee and a 12-month yield of 3.3%. It holds mostly investment-grade muni bonds, but the credit quality is BBB, which is the lower end of investment grades among its typically A-rated peers. That approach can affect the fund during downturns.

Northern Arizona Tax-Exempt Fund (NOAZX)

Robert Elzholz, senior investment manager at REDW Wealth, says for his high-income clients in Arizona where the muni bond market is tight, he likes NOAZX. “(It) generates great income, and Northern Trust has managed both the yield and credit side of the fund,” he says. While the fund is best for Arizona residents who can benefit from both state and federal tax-exempt income, it could be suitable for non-Arizona residents, depending on their situations, he says. It has a low expense ratio of 0.47% and a 12-month yield of 2.38%.

Here are nine muni bond funds to buy and hold:

— Vanguard Tax-Exempt Bond ETF (VTEB)

— Baird Short-Term Municipal Bond Fund (BTMIX)

— PIMCO National Municipal Intermediate Value Fund (GNMVX)

— Northern Intermediate Tax-Exempt Fund (NOITX)

— Nuveen Dynamic Municipal Opportunities Fund (NDMO)

— VanEck Vectors High Yield Municipal Index ETF (HYD)

— Nuveen High Yield Municipal Bond Fund (NHMRX)

— Nuveen All-American Municipal Bond Fund (FAARX)

— Northern Arizona Tax-Exempt Fund (NOAZX)

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