Municipal Bond Funds: Explained, Strategies, and Top Performers

A municipal bond fund serves as an investment instrument focused on municipal bonds—debt securities issued by government entities to fund capital projects. The management of these funds involves nuanced strategies considering factors such as geographical location, credit quality, and maturity.

Municipal bond funds differentiate themselves by offering tax exemptions, making them an attractive choice for investors seeking both yield and stability in a fixed-income portfolio. These funds construct portfolios with a diverse range of municipal bonds, providing investors with the benefits of municipal securities while mitigating the risk associated with individual issuers through effective diversification.

Strategic considerations within municipal bond funds vary based on location, credit quality, and maturity. Investment objectives generally span from conservative to high yield, with a keen eye on the fund’s maturity date. Regular distributions to investors, sourced from coupon payments and capital gains, establish a consistent income stream.

Investors are drawn to municipal bond funds due to their income and tax exemption benefits. These funds enjoy federal tax exemption and may also be exempt from state taxes if the bonds are primarily issued within the state of the investor’s residence.

Beyond tax advantages, municipal bond funds offer attractive distributions, making them a preferred choice for income-focused investors. Distributions occur on varying schedules—monthly, quarterly, semi-annually, or annually. Investors can evaluate a fund’s distributions through trailing and forward yield metrics, providing insights into historical and anticipated returns.

For potential investors, the top-performing municipal bond funds in Q3 of 2022 include the Invesco VRDO Tax-Free ETF (PVI), tracking U.S. dollar tax-exempt variable rate demand obligations. The iShares iBonds Dec 2022 Term Muni Bond ETF (IMBK) is another standout, following the S&P AMT-Free Municipal Series Dec 2022 Index. The Invesco BulletShares 2022 Municipal Bond ETF (BSMM) also merits attention, offering performance comparable to IMBK with a lower dividend yield.

Yes, municipal bonds are generally considered low-risk investments. They are backed by the issuing government entity and have a historically low default rate.

Municipal bond funds pool investors’ money to create diversified portfolios, reducing the impact of defaults by individual issuers compared to holding individual bonds.

While municipal bond funds offer tax advantages and stable income, suitability depends on factors such as risk tolerance, investment goals, and time horizon. They may not be suitable for all investors.

Municipal bond funds pay distributions on varying schedules—monthly, quarterly, semi-annually, or annually, depending on the fund’s structure.