Mutual funds having significant exposure to municipal bonds, also known as “munis,” are excellent choices for risk-averse investors looking to derive stable tax-free returns. These funds seek to provide returns with a low level of risk by investing in municipal debt securities issued by state and local governments.
These securities are believed to provide steady returns exempted from federal taxes and in many cases from state taxes as well, which is why investors prefer these securities in a choppy market. Though munis are expected to provide lower yields than taxable bonds, they fetch better returns for investors in high tax brackets if we consider after-tax returns.
Below we share with you four top-ranked municipal bond mutual funds. Each has earned a Zacks #1 Rank (Strong Buy) and is expected to outperform its peers in the future. Investors can click here to see the complete list of funds.
Lord Abbett Intermediate Tax Free A LISAX invests 80% of its net assets in municipal bonds that are capable of paying interest exempt from federal tax. The fund aims for the maximum amount of interest income exempted possible from the federal income tax, with reasonable risk. LISAX uses the Bloomberg Barclays (LON:BARC) 1-15 Year Municipal Bond Index’s volatility as an approximation of reasonable risk. Lord Abbett Intermediate Tax Free A has returned 1.8% in the past three years.
LISAX has an expense ratio of 0.70% compared with the category average of 0.75%.
Eaton (NYSE:ETN) Vance PA Municipal Income A ETPAX aims for capital gains by investing 75% of its net assets in municipal bonds that are rated at least investment grade at the time of investment. If unrated, the investment advisor can determine whether it is investment grade or not and then invest accordingly. The fund aims to provide current income exempted from regular federal tax. Eaton Vance PA Municipal Income A has returned 1.7% in the past three years.
Adam A. Weigold is the fund manager of ETPAX since 2007.
Wells Fargo (NYSE:WFC) Municipal Bond A WMFAX invests the majority of its net assets in municipal securities, whose interest is exempted from federal tax. The fund also invests up to 20% of its assets in securities on whose interest federal AMT may be applicable. Wells Fargo Municipal Bond A has returned 2.6% in the past three years.
As of November 2018, WMFAX held 691 issues, with 5.46% of its assets invested in Us 5yr Note (Cbt) Mar19 Xcbt 20190329.
To view the Zacks Rank and past performance of all municipal bond mutual funds, investors can click here to see the complete list of funds.
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Zacks Investment Research