Investing in municipal bond funds allows investors to diversify among general obligation and revenue bonds with the potential for tax-exempt earnings. Bonds issued to finance things like stadiums, replenishment of a municipality’s underfunded pension plan, or investor-led housing are a few examples of issues that would not qualify for federal tax exemption. Municipal Bond Funds. Emerging Market Funds. Municipal Bond Funds. The revised issue price is par for a bond originally issued at a price greater than or equal to par. Morningstar. PIMCO’s highly rated municipal bond funds are actively managed by a veteran team of 30 dedicated portfolio managers and credit analysts, who tap into the full spectrum of PIMCO’s resources, time-tested experience and nearly 50 years of fixed income expertise. There can be no assurance that bonds validly issued will not be partially or totally repudiated by the issuing state or municipality, should that be deemed reasonable and necessary to serve other important public purposes. You can buy municipal bonds directly from a registered municipal bond seller. Municipal bonds may be an option for income-oriented investors looking to reduce federal and, possibly, state income tax bills. Treasuries are issued at the federal level. General obligation bonds are issued by governmental entities but are not backed by revenues from a specific project, such as a toll road. The funds can include bonds issuers in the same state or different states, depending on the strategies of the respective funds. Fund managers invest a minimum of 80% of the fund's $2.5 billion assets in debt securities that are exempt from federal and Maryland state and local personal income taxes.. The longer the maturity, the more sensitive the fund is to changes in interest rates. Tax laws and regulations are complex and subject to change, which can materially impact investment results. With revenue bonds, the interest and principal are dependent on the revenues paid by users of a facility or service, or other dedicated revenues including those from special taxes. and then to make a choice from a set of municipal securities that meet those criteria. The overall economic health of the region or customer base and the impact it might have on the entity's ability to sustain its revenues. Most mutual fund companies now offer bond funds in addition to mutual funds that specialize in groups of equities or indexes. Funds take rate risk when they buy bonds with far-out maturities—25 years, say, instead of 5 years. Like other bonds, investors lend money to the issuer for a predetermined period of time. Repudiation risk Municipal bond funds. Get information on the health and nature of a new issue’s revenue stream (taxpayers/customers), the operational capabilities or efficiency of the entity, and the competency of financial management at the organization over time. Accessed Nov. 14, 2020. The fund seeks to provide investors with current income that is exempt from federal personal income tax by investing a minimum of 75% of its $78.2 billion in assets in municipal bonds rated in the top three rating categories.. Through September 10, the S&P Municipal Bond Index returned 6.8%, outpacing the index’s 4.5% average annual return over the 10-year period through that date. Also, if you sell a municipal bond, the proceeds from that sale may be subject to capital gains or other types of taxes. Escamilla says the fund… The offers that appear in this table are from partnerships from which Investopedia receives compensation. Tax exemptions 5 Stars (49 funds rated); 5 Yrs. Barbara A. Friedberg, MBA, MS is … Take this quick test to find out. A municipal bond, also known as a muni, is debt security used to fund capital expenditures for a county, municipality, or state. The only exception is when a municipality issues bonds as a conduit issuer. The third-party borrower—not the issuing conduit agency—is responsible for interest payments and principal repayments. Municipal bond mutual funds offer tax-exempt yields to certain investors, using diversified portfolios that mitigate some of the debt instruments' risk. For instance, a portion of the income you receive may be subject to the federal alternative minimum tax, even if that income is classified as tax free. The entity's track record of operational effectiveness through multiple economic cycles. Probably the most important thing to understand when deciding whether or not to invest in municipal bonds is the taxable equivalent yield. Tax-advantaged refers to any type of investment, account, or plan that is either exempt from taxation, tax-deferred, or offers other types of tax benefits. As of November 2020, the Vanguard Intermediate-Term Tax-Exempt Fund has generated a 10-year annualized return of 3.59% with an exceptionally low expense ratio of 0.17%. Although a municipal bond may be referred to as tax-exempt, there could be federal and state tax consequences when you buy, sell, or own the bond. Fixed-income funds that distribute income that is not subject to taxation at the federal, state, and sometimes local levels. The issuers of revenue bonds are generally: Insured bonds Some municipal bonds are insured by policies written by commercial insurance companies. The competence of financial management of the entity. If the market discount is above the De Minimis threshold, it will be taxed at your ordinary income tax rate. Pre-refunded bonds 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. Important legal information about the email you will be sending. Market prices of zero-coupon bonds tend to be more volatile than bonds that pay interest regularly. Vanguard Municipal Bond To find out detailed information on Vanguard Municipal Bond in the U.S., click the tabs in the table below. Municipal bonds—or muni bonds—are fixed income securities issued by local or state governments to fund public projects. Private-sector corporations (such as hospitals and universities). Revenue sources risk The mutual fund's expense ratio is 0.67%, and investors are charged an upfront sales load of 3.75% when they purchase shares. Source: Lipper. Through September 10, the S&P Municipal Bond Index returned 6.8%, outpacing the index’s 4.5% average annual return over the 10-year period through that date. What’s more, muni bonds’ 2019 performance has been relatively strong. De Minimis Tax Risk Fidelity does not provide legal or tax advice. While municipal bonds are attractive to investors in higher tax brackets, the securities carry a degree of risk. The Fund normally invests at least 80% of its net assets in municipal bonds and may invest in all types including pre-refunded bonds, general obligation bonds, revenue bonds, municipal lease participations and zero coupon bonds. The issuing agency generally is not obligated to use any other source to repay the bonds if the conduit borrower fails to make loan repayments. The legal provisions that may be in place to protect the bondholder, such as rate covenants and debt service reserve funds. This can be attributed to the large number of municipal issuers and variety of securities. Morningstar. Bonds that are backed by the government or one of its agencies have the best "creditworthiness" and a lower chance of default than most corporate bonds. Actively managed fund that provides investors with access to the high yield municipal bond market with a more conservative fund profile by maintaining at least a 60% allocation to investment grade holdings 1; Seeks to provide investors with guardrails while investing in high yield municipal bonds as it has historically reduced volatility relative to its primary benchmark 2 In some cases, bond issuers will call bonds to modify an indenture through a new offering. In this paper, Justin Marlowe of University of Chicago Harris School of Public Policy examines the relationship between exchange-traded funds (ETFs) and the liquidity profiles of municipal bonds. Conduit bonds may be issued for projects such as nonprofit hospitals, housing developments, colleges and universities, transportation hubs, student loan programs, and public works projects. Selling prior to maturity can present a challenge for municipal bond investors due to the fragmented and thinly traded nature of the market. A government bond is issued by a government at the federal, state, or local level to raise debt capital. Accessed Nov. 14, 2020. Principal and interest payments for revenue bonds are secured by revenues generated by the issuer or by certain taxes such as sales, fuel, or hotel occupancy taxes. The escrow account is most often funded with U.S. Treasuries (although other instruments are sometimes used), in which case the escrowed bonds are considered relatively safe. (Separate multiple email addresses with commas). Fund Perf. However, municipal bond ETFs and mutual funds will do a portion of this research for you and can be a lifesaver for investors with busy schedules. The fund's mandate is to invest at least 80% of its assets in municipal bonds having investment-grade quality, which are bonds rated BBB or higher. Tax risks In general, the interest you earn from your tax-exempt municipal securities is exempt from federal income tax and in some cases, state or local income tax, depending on whether you are a resident of the state that issued the bond. Thus, as prices of bonds in the fund adjust to a rise in interest rates, the fund's share price may decline. Fund Flow Leaderboard. American Funds High-Income Municipal Bond Fund had only a quarter of its assets in bonds rated BB or below, with 45% of assets investment grade and an additional 24% unrated. In fact, they set an annual record of $105 billion through Dec. 31 into open-end mutual funds and exchange traded funds, as illustrated in the chart below. Is the bond solely dependent upon one source of revenue or is a larger entity standing behind the issue? What’s more, muni bonds’ 2019 performance has been relatively strong. Probably the most important thing to understand when deciding whether or not to invest in municipal bonds is the taxable equivalent yield. Accessed Nov. 14, 2020. A municipal bond is a debt issued by a state or municipality to fund public works. The reason: Investment-grade municipal bonds often combine two characteristics generally not shared by other investments: tax-exempt income and high credit quality. Additionally, if you purchase original-issue discount bonds and hold them until their maturity date, those investments may receive special tax treatment under federal tax law. Revenue bonds Municipal bond funds invest in municipal bonds, debt instruments issued by state and local governments to help fund capital projects. For instance, if one municipal bond category falls just across the dividing line from another municipal bond category, even though both invest in very similar types of assets, both categories are adjusted so that they are given the same risk assignment. Income from the municipal bonds held could be declared taxable because of changes in tax laws. While municipal bonds' coupons are often lower than those offered by similarly rated corporate bonds, the fact that interest income is tax-free can result in the yields being comparable, or even higher in some cases. Morningstar. BNY Mellon Municipal Bond Infrastructure Fund, Inc. (NYSE: DMB) Announces Dividend Business Wire NEW YORK -- January 5, 2021 BNY Mellon Municipal Bond Infrastructure Fund, Inc. … A municipal bond can also be issued by legal entities such as a housing authority or a port authority. The interest received on a municipal bond is generally exempt from federal tax, and in some cases, state and city tax as well. The Pimco Intermediate Municipal Bond Active Exchange-Traded Fund (MUNI, $53.83) is a one-stop shop for muni bonds that offers a good tradeoff between yield and interest-rate risk. Morningstar. Please see De Minimis Dilemma (PDF) for more details. So, if you purchased this bond for 92.75, ordinary income tax will apply on the entire amount of the difference (99 - 92.75) when the bond is redeemed at par, since 92.75 is less than 96.75. Consult an attorney or tax professional regarding your specific situation. All information was current as of December 2020. The HYD is a broad fund of more than 1,500 holdings, with the heaviest weights shouldered by municipal bonds from California (16.5%), Illinois (12%) and Ohio (8.2%). You can learn more about the standards we follow in producing accurate, unbiased content in our. If you are looking at a 20 year municipal bond with a revised issue price of 99 and nine complete years left until maturity, the de minimis discount is 0.25 x 9 years = 2.25. a legal document required by the Securities and Exchange Commission (SEC) that discloses an investment's objectives, past performance, and other information to parties considering investing in financial instruments such as stocks, bonds, mutual funds, etc. It is a violation of law in some jurisdictions to falsely identify yourself in an email. the interest received from a security's last coupon interest payment date up to the current date or date of valuation; when calculating accrued interest for a bond traded in the secondary market, the seller receives interest up to, but not including, the settlement date from the buyer, agency bonds are issued by U.S. government bodies, like Tennessee Valley Authority (TVA); Government Sponsored Enterprise (GSE) bonds are offered through an act of Congress created to assist groups of borrowers; the principal and interest of GSE bonds are not guaranteed by the U.S. government, a category of taxable municipal bonds which can be one of two types; the first type provides a Federal subsidy through Federal tax credits to investors in the bonds; the second type provides a Federal subsidy through a refundable tax credit paid to state or local governmental issuers, the interest rate a bond's issuer promises to pay to the bondholder until maturity, or other redemption event; generally expressed as an annual percentage of the bond's face value, a debt security issued by a private corporation; interest is taxable and is generally paid according to a coupon rate set at the time the bond is issued; generally have a face value of $1,000 and a specific maturity date, measurement of the risk of default of an individual fixed-income security or the issuer of a fixed-income security; generally measured by one of the major ratings agencies, an interest-bearing promise to pay a specified sum of money (the principal amount) on a specific date; bonds are a form of debt obligation; categories of bonds are corporate, municipal, treasury, agency/GSE, occurs when a bond issuer fails to make either an interest payment or principal repayment on its bonds as they come due, or fails to meet some other provision of the bond indenture, a provision which allows a bond issuer the right to call its bonds before maturity if certain specified events occur (as specified in the offering statement), such as natural disasters,cancelled projects, to almost anything else, the stated value of an investment at maturity; the face value for a corporate bond is typically $1,000; also known as par value or par amount, a type of asset class in which the investments provide a return in two possible forms; coupon paying bonds have fixed periodic payments and a return of principal; zero coupon bonds are sold at a discount, do not pay a coupon, and have a return of principal plus all accumulated interest at maturity, a contract that explains the various terms, options and intricacies of a bond, the amount paid by a borrower to a creditor, or bondholder, as compensation for the use of borrowed money, the dollar amount of all interest earned on government and corporate debt obligations and short-term certificates of deposit, as well as interest earned from cash in a brokerage account, the annual rate, expressed as a percentage of principal, payable for use of borrowed money, a government, corporation, municipality, or agency that has issued a security (e.g., a bond) in order to raise capital or to repay other debt; the issuer goes to an underwriter to get their securities sold in the new issue market; for certificates of deposit (CDs), this is the bank that has issued the CD; in the case of fixed income securities, the issuer of the security is the primary determinant of the security's characteristics (e.g., coupon interest rate, maturity, call features, etc. Oppenheimer Rochester High Yield Municipal Fund Class A. They may also be adjusted by judgment. HYMB is a muni bond fund that tracks a tier-weighted index of high-yield and investment-grade U.S. muni bonds with at least one year to maturity. Municipal bond funds are generally purchased for the favorable tax treatment given to municipal bonds and the diversification benefits of a mutual fund. Municipal bonds are debt obligations issued by public entities that use the loans to fund public projects such as the construction of schools, hospitals, and highways. Interest rate risk In addition, under federal bankruptcy laws, a municipality must be specifically authorized by its state to file for protection, and the rules that govern a bankruptcy differ from state to state. Municipal Bond Municipal Bond Funds and ETFs invest the majority of their assets in tax-advantaged municipal bonds. Zero-coupon bonds Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Conduit bonds The mutual fund diversifies holdings across low and highly rated bond issues, with a significant amount of assets in debt securities rated BBB+ or below. In general, municipal bonds fall into one of two categories—general obligation or revenue bonds. Spryng TM by Franklin Templeton. Like all fixed income securities, the market prices of municipal bonds are susceptible to fluctuations in interest rates. While most investors think of municipal bonds as tax-exempt investments, this may not always be the case, as there are instances where the income generated by a municipal bond may be taxable. Under normal market conditions, the Trust invests at least 80% of its managed assets in taxable municipal securities, which include Build America Bonds. Finally, it's important to remember that tax laws may change. Example: Escamilla says the fund's discount to NAV is 7%, and it is trading well below its three-year average discount of 4.4%. A type of risk called "special event risk," lawsuits or significant legal changes, another community’s public works project, unusual weather, an economic downturn, or other events could impact the issuer's ability to meet their financial commitments. Accessed Nov. 14, 2020. This is the lowest price the bond can be purchased for in order for the market discount to be treated as a capital gain. These funds typically include revenue bonds and general obligation bonds with various maturity dates. With a 6.42% average return for the past 3 years and a 5-star Morningstar rating, the Nuveen High Yield Municipal Bond Fund is a strong performer, … "American High-Income Municipal Bond A." Morningstar. The escrow account is most often funded with U.S. Treasuries (although other instruments are sometimes used), in which case the pre-refunded bonds are considered relatively safe. Taxable Equivalent Yield. Escrowed-to-maturity (ETM) bonds The mutual fund has an expense ratio of 0.95% and an up-front sales load of 4.25%. The mutual fund does not impose an upfront or a deferral sales charge to investors, although an initial investment of $2,500 is required for both qualified and non-qualified accounts., The Oppenheimer Rochester High Yield Municipal Fund (ORNAX) has an inception date of October 1993. Municipal bond funds are no different, and their performance is measured against the performance of their peers or peer group, and most often, meaningful statistical data concerning the variations of returns, or the variations in asset value versus an overall index, are often overlooked in favor of performance. How much debt does it have? Tax on capital gains. 3-month fund flows is a metric that can be used to gauge the perceived popularity amongst investors of Municipal Bonds relative to other bonds. Accessed Nov. 14, 2020. As a result of these different treatments, it's important to consider all aspects of a municipal bond before making a purchase, rather than relying on its broad categorization. Taxable Equivalent Yield. Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares, 4. As a result, they have slightly lower interest rates than taxable bonds. Retirement Income IQ Test. If interest rates rise, market prices of existing bonds will typically decline, despite the lack of change in both the coupon rate and maturity. 1. BABs only subsidize an issuer’s borrowing cost. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. This effect is usually more pronounced for longer-term securities.) 1. Take the Test. 5 Stars (42 funds rated). 1. A minimum investment of $250 is required for both qualified and non-qualified investment accounts., The Nuveen High Yield Municipal Bond Fund (NHMRX) was established in 1999 and sought to provide investors with current income exempt from federal tax. Investors should take into account the creditworthiness of both the insurer and the issuer when considering insured bonds. Because municipal bonds are sensitive to interest rate movements, the fund's yield and share price will fluctuate with market conditions. How much of its cash flow is committed to paying down debt vs. investing in new projects or supporting services of value for the community. Municipalities issue notes to generate stable cash flow while they wait for other expected revenues. That risk taking pays off in periods, such as the first half of 2020, when interest rates decline. Capital appreciation is a secondary investment objective of the fund. Municipal bonds (or “munis” for short) are debt securities issued by states, cities, counties and other governmental entities to fund day-to-day obligations and to finance capital projects such as building schools, highways or sewer systems. Bond holdings range in duration, and debt securities within the fund are focused on higher-quality issues. Municipal bonds are securities issued by local governments, such as a city, state, county or municipality. These are municipal bonds issued at a price below face value (par) which qualify for special treatment under federal tax law. The De Minimis rule states that if the market discount (revised issue price less the purchase price) is less than 0.25 multiplied by the number of full years to maturity after acquisition, the market discount is treated as a capital gain for tax purposes. Baird uses a value-oriented strategy and looks for undervalued municipal securities that offer above-average return characteristics. This fund is targeted at higher net-worth investors, who are required to make an initial investment of $100,000 for qualified and non-qualified accounts., The Vanguard Intermediate-Term Tax-Exempt Fund (VWITX) has an inception date of 1977, making it one of the longest-standing municipal bond mutual funds on the market. The American High-Income Municipal Bond Fund (AMHIX) was established in 1994 to provide investors with a high level of current income exempt from regular federal income tax. The fund's managers invest a substantial portion of the fund's $7.8 billion assets in municipal bond debt securities exempt from federal tax.. Please see our section on Tax risks for more details. Original-issue discount bonds However, when an investor holds single bond securities, the investor has control over the selection of the securities and the timing of purchase and sale. 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