For individual investors seeking tax-advantaged investment strategies in the fixed-income space, municipal bonds offer an attractive solution. Municipal bonds, also known as “munis,” are debt securities issued by government entities that provide modest returns by way of interest payments over the duration of the bonds. The interest received on a municipal bond is generally exempt from federal tax, and in some cases, state and city taxes as well.
Individual investors may either purchase municipal bonds individually through the entity issuing the security or use a pooled investment strategy such as a mutual fund to gain more exposure to multiple municipal bond issues.
Key Takeaways
- Municipal bond mutual funds outperformed their respective Morningstar bond fund categories over the past year, as demonstrated below.
- The funds with the best one-year trailing total returns are BATEX, MDYHX, THYTX, DVHIX, and TXRAX.
- The top holdings of the first, third, and fourth of these funds are bonds issued by the Tobacco Settlement Financing Authority of Buckeye, Ohio; the top holdings of the second fund are bonds issued by the Washington State Housing Finance Commission; and the top holdings of the fifth fund are bonds issued by the state of California.
We look at the top five municipal bond funds as ranked by each’s one-year trailing total return (TTM) as of the close of markets on Dec. 10, 2021. The funds were selected from a group of funds that are open to new investors, require a minimum initial investment of $1,000 at most, and have assets under management (AUM) of at least $50 million. The first four funds all fall under Morningstar’s “High Yield Muni” category, which had an average total return of 6.0% over the past year. The last fund belongs to the “Muni National Intermediate” category, which provided a total return of 1.9% over the same period.
All data below is as of Dec. 10, 2021.
BlackRock Allocation Target Shares Series E (BATEX)
- One-Year Trailing Return: 10.0%
- Expense Ratio: 0.05%
- Trailing-12-Month (TTM) Dividend Yield: 3.68%
- Assets Under Management: $426.1 million
- Inception Date: Aug. 4, 2014
BATEX is managed by Theodore R. Jaeckel, Walter O’Connor, and Michael Perilli. The fund’s primary objective is to maximize federal tax-free yield, which it aims to achieve by investing in a combination of investment grade and non-investment grade municipal bonds. Its secondary goal is focused on total return.
More than half of BATEX’s bond holdings are either not rated or have a credit rating of BB, which is just below investment grade. Most of the fund’s holdings have a maturity of 20 years or more. BATEX has an effective duration of approximately 8.5 years.
BATEX’s top three holdings are bonds issued by the Tobacco Settlement Financing Authority of Buckeye, Ohio; the city of Reno, Nev.; and the New Jersey Transportation Trust Fund Authority.
BlackRock High Yield Municipal Fund Investor A Shares (MDYHX)
- One-Year Trailing Return: 9.6%
- Expense Ratio: 0.85%
- Trailing-12-Month (TTM) Dividend Yield: 2.81%
- Assets Under Management: $2.3 billion
- Inception Date: Aug. 1, 2006
Like BATEX, MDYHX is also managed by Jaeckel, O’Connor, and Perilli. The fund attempts to achieve attractive, tax-advantaged income through exposure to high-income and low-volatility holdings.
MDYHX invests at least 80% of its assets in munis. At least 65% of its net assets are invested in medium- to low-quality bonds. The majority of its bond holdings have a maturity of at least 20 years. The fund has an effective duration of approximately 7.8 years.
MDYHX’s top three holdings are bonds issued by the Washington State Housing Finance Commission, the commonwealth of Puerto Rico, and the Arkansas Development Finance Authority.
Transamerica High Yield Muni I2 (THYTX)
- One-Year Trailing Return: 8.7%
- Expense Ratio: 0.75%
- Trailing-12-Month (TTM) Dividend Yield: 3.06%
- Assets Under Management: $187.6 million
- Inception Date: Sept. 30, 2016
THYTX is managed by Matthew Dalton and Max Christiana. The fund aims to maximize total return by investing in medium- and lower-grade munis that are exempt from federal income tax.
The majority of THYTX’s holdings have a credit rating of either BBB or BB or are not rated. Most of the bonds in the portfolio have a maturity of 20 years or more. The fund has an effective duration of approximately 4.9 years.
THYTX’s top three holdings are bonds issued by the Tobacco Settlement Financing Authority of Buckeye, Ohio; the Development Authority of LaGrange, Ga.; and the Virginia Small Business Financing Authority.
Delaware National High Yield Municipal Bond Fund Institutional Class (DVHIX)
- One-Year Trailing Return: 8.4%
- Expense Ratio: 0.60%
- Trailing-12-Month (TTM) Dividend Yield: 3.66%
- Assets Under Management: $1.8 billion
- Inception Date: Dec. 31, 2008
DVHIX is managed by Stephen J. Czepiel, Gregory A. Gizzi, and Jake van Roden. The fund aims to maximize income that is exempt from federal income tax by primarily investing in munis of medium- and lower-grade credit quality.
The majority of DVHIX’s bond holdings are not rated. Its next largest exposure is to munis with a BBB credit rating, followed by BB and AAA munis. Most of the fund’s holdings have a maturity of at least 20 years. DVHIX has an effective duration of approximately 8.1 years.
DVHIX’s top three holdings are bonds issued by the Tobacco Settlement Financing Authority of Buckeye, Ohio; the Puerto Rico Sales Tax Financing Corp.; and the University of Texas.
JPMorgan Tax Aware Real Return Fund Class A (TXRAX)
- One-Year Trailing Return: 8.3%
- Expense Ratio: 0.75%
- Trailing-12-Month (TTM) Dividend Yield: 1.32%
- Assets Under Management: $597.2 million
- Inception Date: Aug. 31, 2005
TXRAX is managed by Richard D. Taormina and David P. Rooney. The fund primarily invests in munis whose interest payments are exempt from federal income taxes. It also uses inflation swap contracts to minimize the impact of inflation.
TXRAX’s largest exposure is in municipal bonds with a AA credit rating, followed by munis with A and AAA credit ratings. The majority of its bond holdings have a maturity from five to 15 years. TXRAX has an effective duration of approximately 3.5 years.
TXRAX’s top three holdings are bonds issued by the state of California, the Tennessee Energy Acquisition Corp., and the Water & Sewer System of Houston, Texas.
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