These exchange-traded funds own municipal bonds, with coupons mostly exempt from federal taxation.
Until a few years ago ETFs were a poor choice for investors seeking tax-exempt income. Their expense ratios ate up too large a chunk of your coupons.
That changed in 2015, when cost-conscious Vanguard added a muni-bond offering to its ETF lineup. In 2018 BlackRock responded by slashing the fee on its $9 billion iShares National Muni Bond (MUB). Vanguard deserves praise not just for cutting the costs imposed on its own customers but for inspiring competitors to cut costs imposed on their customers.
The big iShares ETF and its sister fund Short-Term National Muni (SUB) are the cost winners now. MUB and SUB are on our Honor Roll.
This category covers a wide range in maturities, which is to say in interest-rate hazards and yields. To make comparisons on those scores, turn to Morningstar.
But never lose sight of costs. Consider that a portfolio of tax-exempt bonds will yield something like 2.5% and that inflation is something like 2%. Your real return, before expenses, is going to be 0.5%. Knock off 0.5% for expenses, which an expensive muni ETF (not eligible for this survey) will soak you, and you are left with nothing.
Best ETFs: Tax-Exempt Bonds
|Ticker||Exchange-Traded Fund||Holding cost1||Liquidity score2||Assets ($bil)|
|MUB||iShares National Muni Bond*||$116||A||9.0|
|SUB||iShares Short-Term National Muni Bd*||121||B||1.5|
|VTEB||Vanguard Tax-Exempt Bond||149||A||2.7|
|IBMH||iShares iBonds Sep 2019 Term Muni Bd||303||B||0.3|
|IBMJ||iShares iBonds Dec 2021 Term Muni Bd||305||C||0.2|
|IBMI||iShares iBonds Sep 2020 Term Muni Bd||307||C||0.3|
|IBMG||iShares iBonds Sep 2018 Term Muni Bd||308||C||0.2|
|IBMK||iShares iBonds Dec 2022 Term Muni Bd||314||C||0.2|
|IBML||iShares iBonds Dec 2023 Term Muni Bd||323||D||0.1|
|SHM||SPDR Nuveen Blmbg Barclays ST Muni Bd||327||A||3.7|
|SMB||VanEck Vectors AMT-Free Short Muni||344||C||0.2|
|TFI||SPDR Nuveen Blmbg Barclays Muni Bd||376||A||2.8|
|ITM||VanEck Vectors AMT-Free Interm Muni||394||B||1.7|
|MEAR||iShares Short Maturity Municipal Bd||416||C||0.1|
|MLN||VanEck Vectors AMT-Free Long Muni||419||C||0.2|
|PVI||PowerShares VRDO Tax-Free Weekly||431||D||0.1|
|PZA||PowerShares National AMT-Free Muni Bd||458||B||1.6|
|MMIN||IQ MacKay Shields Muncpl Insrd||506||D||0.01|
|PRB||VanEck Vectors Pre-Refunded Muni||506||F||0.01|
|MMIT||IQ MacKay Shields Muncpl Intern||508||C||0.03|
|RVNU||Xtrackers Municipal Infras Rev Bd||551||D||0.1|
|HYD||VanEck Vectors High-Yield Municipal||568||A||2.5|
|HMOP||Hartford Municipal Opportunities||590||D||0.01|
|SMMU||Pimco Short Term Municipal Bond Actv||601||D||0.1|
|SHYD||VanEck Vectors Short High-Yield Muni||621||D||0.1|
|MUNI||Pimco Intermediate Municipal Bd Actv||633||D||0.3|
|HTAB||Hartford Schroders Tax-Aware Bond||663||C||0.02|
|CMF||iShares California Muni Bond||413||B||0.9|
|NYF||iShares New York Muni Bond||419||C||0.3|
|PWZ||PowerShares Calif AMT-Free Muni Bd||489||C||0.3|
|PZT||PowerShares New York AMT-Free Muni Bd||490||D||0.1|
*Best ETFs Honor Roll Member
1 Cumulative cost of holding a $10,000 position for a decade. Incorporates annual expense ratio, bid/ask spreads and cost offset from securities lending. 2Reflects bid/ask spreads and trading volume. A = easy to trade.
Data sources: Morningstar, Bloomberg, fund distributors.