Top 10 Best Tax Free Municipal Bond Mutual Funds

Intro

The following article will provide top 10 list of municipal bond mutual funds also known as non taxable bond funds. Bond fund is another good way to diversify investor investment portfolio. Bond funds are also less volatile than stock funds (domestic, international, emerging market). Bond funds also can provide monthly income through distribution or dividend. With the past 2 years of uncertainty and economy crisis, bond fund has been one of the best performing assets for many investors. One way to invest in bond is using bond mutual funds. Though investor should be careful, with the bond value is increasing the yield is decreasing and vice versa.

Bond also known as fixed income can be classified into two main categories such as taxable bonds and non taxable bonds. Taxable bond can consist of short term bond, intermediate term bond, long term Bond, Investment Grade Corporate Bond, High Yield Corporate bond (Non Investment Grade corporate bond), Treasury Inflation Protected (TIP) Bond. As I explained in my previous article, taxable bond fund income will be taxable in Federal tax and state tax. Depend on various States; some states may not have any income tax etc. More details can be read in my previous article. In this article, the municipal bond has advantages especially for people that pay high income tax. These municipal bond funds mostly consist of bonds issued by various US States whether California, Texas, New Jersey, Arizona, Michiga#mce_temp_url#n etc. The non taxable bonds consist mainly the municipal bonds either investment grade municipal bond or non investment grade municipal bond. Another reason to invest in municipal bond is to support an investment in most American states or local government level. Non taxable bond mutual funds dividend is usually non taxable as stated. This will make these funds very attractive. For example, if someone currently pays a 35% federal tax and has a 4.1% yield municipal bond fund. This person essentially has received 5.35% before tax. For this article I will focus on municipal bond mutual funds.

Please check my articles about Muni Bond ETF and Muni Bond CEF:


Mutual Fund Criteria

My list mainly consists of 3 or more star of Morningstar rating and big asset underlying the municipal bond mutual funds or muni fixed income fund. Usually, big asset means lot of confident by investor as well constitutional to invest in these funds. With 3 or more star rating, this means the fund has consistently perform under any market condition and should perform better or at least average compare to many of its index benchmark. I also provide list that doesn’t include only 1 state municipal bond funds, this means the list is more diversify and includes multiple states in US.

The following is the Top 10 Best Tax Free Municipal Bond mutual funds:

  1. Vanguard Intermediate Term Tax Exempt Fund - VWITX
  2. Vanguard Limited Term Tax Exempt Fund - VMLTX
  3. Franklin Federal Tax Free Income - FKTIX
  4. American Funds Tax Exempt Bond - AFTEX
  5. Franklin High Yield Tax Free Income Fund - FRHIX
  6. Vanguard Long Term Tax Exempt Fund - VWLTX
  7. Wells Fargo Advantage Ultra Short Term Municipal Income Fund - SMAVX
  8. Vanguard High Yield Tax Exempt Fund - VWAHX
  9. Fidelity Municipal Income - FHIGX
  10. Legg Mason Western Asset Managed Municipals - SHMMX

Note: The yield is as current as October 1st, 2010

Municipal Bond Mutual Funds comparison

(click column header to sort results)
No  
Mutual Funds Description  
Ticker  
Category  
Expense ratio  
Morningstar Rating  
Yield  
Total Asset  
Min Invest  
1 yr  
3 yr  
5 yr  
10 yr  
1
Vanguard Int Term Tax Exempt
VWITX
Muni National Inter
0.20%
4
3.57%
30 Bil
$3,000
5.00%
5.78%
4.86%
4.99%
2
Vanguard Ltd Term Tax Exempt
VMLTX
Muni Short
0.20%
3
2.34%
13 Bil
$3,000
3.31%
4.27%
3.87%
3.84%
3
Franklin Fed Tax-Free Income
FKTIX
Muni National Long
0.61%
4
4.26%
11 Bil
$1,000
0.93%
3.64%
3.73%
4.86%
4
American Funds Tax Exempt Bnd
AFTEX
Muni National Inter
0.56%
3
3.81%
10 Bil
$250
1.79%
3.38%
3.38%
4.66%
5
Franklin HY Tax Free Income
FRHIX
High Yield Muni
0.63%
4
5.06%
8 Bil
$1,000
3.56%
3.26%
3.70%
5.03%
6
Vanguard Long Term Tax Ex Fund
VWLTX
Muni National Long
0.20%
4
4.21%
8 Bil
$3,000
5.05%
5.35%
4.66%
5.49%
7
Wells F Adv U/S Term Mun Inc
SMAVX
Muni Short
0.67%
3
1.22%
7 Bil
$1,000
-0.38%
2.79%
3.03%
2.51%
8
Vanguard HY Tax Exempt Fund
VWAHX
Muni National Inter
0.20%
4
4.39%
7 Bil
$3,000
6.39%
5.22%
4.65%
5.42%
9
Fidelity Municipal Income
FHIGX
Muni National Long
0.48%
4
4.00%
6 Bil
$10,000
5.74%
5.38%
4.67%
5.71%
10
Legg Mason WA Managed Mun
SHMMX
Muni National Long
0.64%
4
4.66%
6 Bil
$1,000
-0.67%
4.54%
4.70%
5.15%
Updated on Oct 1st, 2010
Vanguard Intermediate Term Tax Exempt Portfolio
Vanguard Intermediate Term Tax Exempt Portfolio

More details

1. Vanguard Intermediate Term Tax Exempt Fund, VWITX

The Vanguard Intermediate Term Tax Exempt Fund objective is to provide moderate and sustainable current income that is exempt from federal personal income taxes and actively managed by Michael G. Kobs since 2008. The majority of the investment about 75% is investment grade rated municipal bonds and small investment about 25% is in high yield municipal bonds (junk rated - Baa or BBB). This fund is one of the biggest municipal bond funds in its category with more than 30 billion asset and has the highest Morningstar rating with 5 Stars rating.This gigantic fund has put up respectable numbers recently and has done well despite some changes in its management. Christopher Ryon left the fund in 2007 after a 16-year as the fund manager, and current manager Michael Kobs has been in charge only since 2008. The fund has returned 4.86% over the past five years and 4.99% over the past decade. At the same time, the fund's ultra low annual expense ratio of 0.20% gives investors the best bet to invest in this municipal bond fund. There is no front end sales load and 12b1 fee for this fund. Another class of ticker, VWIUX, has a lower expense ratio of 0.12% only.

2. Vanguard Limited Term Tax Exempt Fund, VMLTX

Another vanguard fund is landed in this list. The Vanguard Limited Term Tax Exempt Fund is to seek current income exempt from federal income tax with limited price volatility. In general, most of the bonds in this fund are short term with a solid track record. It also has similar characteristic as previous vanguard fund, Vanguard Intermediate Term Tax Exempt fund, the majority of the investment about 75% is investment grade rated municipal bonds and small investment about 25% is in high yield municipal bonds (junk rated - Baa or BBB). Manager Marlin Brown has been at the helm only since 2008, when he took over from previous manager, Pam Wisehaupt-Tynan, but the transition has been smooth. This municipal bond fund performed well during the credit crisis period and continues to post consistent returns largely because of its steady conservative strategy. The fund benefited as investors crowded the treasuries market recently. The fund brought in significantly better post-tax yields than treasuries. The fund has returned 3.87% over the past five years and 3.84% over the past decade. There is no front end sales load and 12b1 fee for this fund. The expense ratio is only 0.20%. Another class of ticker, VMLUX, has a lower expense ration of 0.12% only.

3. Franklin Federal Tax Free Income, FKTIX

Franklin Federal Tax-Free IncomeManagement at Franklin Federal Tax-Free Income fund takes its long-term perspective seriously. The fund is known for its conservative strategy that has provided for consistent returns through investments in tax-free municipal bonds. Its portfolio consists of long-term, investment-grade holdings in municipal securities that are free from federal income tax. The fund has returned 5.41% over the past year and 5.15% over the past three years. For this ticker, FKTIX, it currently has a max front end sales load of 4.25% and max 12b1 fee of 0.09%. The total expense ratio is currently at 0.61% per year. Other tickers, which may be offered in institutional account or retirement account or 401k account, may not have these fees and has a lower expense ratio fees such as FFTBX, FRFTX and FAFTX. For FAFTX ticker, there is no front end sales load and 12b1 fee. FAFTX only has 0.52% expense ratio per year.


4. American Funds Tax Exempt Bond, AFTEX

The American Funds Tax Exempt Bondfund will seek high current income exempt from federal income tax. The fund invests primarily in municipal bonds that are exempt from regular federal income tax. The fund has been actively managed by Neil L. Langberg since 1979. It has returned 5.75% over the past year, and 4.70% over the past three years.For this ticker, AFTEX, it currently has a max front end sales load of 3.75% and max 12b1 fee of 0.25%. The total expense ratio is currently at 0.56% per year. Other tickers, which may be offered in institutional account or retirement account or 401k account, may not have these fees and has a lower expense ratio fees such as TEBFX, TEBCX, AFTFX and TEAFX. For ticker, TEAFX, there is no front end sales load and 12b1 fee and only has 0.39% expense ratio per year.

5. Franklin High Yield Tax Free Income Fund, FRHIX

The Franklin High Yield Tax Free Income Fund is seekinghigh current yield exempt from federal income taxes and capital appreciation which is consistent with fund’s principal investment goal.The fund has been actively managed by John Wiley since 1991. It has returned 8.16% over the past year, and 4.76% over the past three years.For this ticker, FRHIX, it currently has a max front end sales load of 4.25% and max 12b1 fee of 0.20%. The total expense ratio is currently at 0.63% per year. Other tickers, which may be offered in institutional account or retirement account or 401k account, may not have these fees and has a lower expense ratio fees such as FYIBX, FHYIX and FHYVX. For ticker, FHYVX, there is no front end sales load and 12b1 fee and only has 0.53% expense ratio per year.

6. Vanguard Long Term Tax Exempt Fund, VWLTX

The Vanguard Long Term Tax Exempt Fund seeks to provide a high and sustainable level of current income that is exempt from federal personal income taxes and is actively managed by Christopher W. Alwine since 2009. The majority of the investment about 75% is investment grade rated municipal bonds and small investment about 25% is in high yield municipal bonds (junk rated - Baa or BBB).The fund has returned 5.05% over the past year, 5.35% over the past three years, and 4.66% over the past five years. The fund has a very low annual expense ratio of 0.20%. There is no front end sales load and 12b1 fee for this fund. Another class of ticker which maybe offer to institutional or 401k account, VWLUX, has a lower expense ratio of 0.12% only.

yahoo mutual fund screener
yahoo mutual fund screener

7. Wells Fargo Advantage Ultra Short Term Municipal Income Fund, SMAVX

The Wells Fargo Advantage Ultra Short Term Municipal Income Fund willseek current income exempt from federal income tax consistent with capital preservation. The majority of the fund’s asset will be invested in municipal securities that pay interest exempt from federal income tax. The fund is actively managed by Lyle Fitterer since 2000. For this ticker, SMAVX, it currently has a max front end sales load of 2.00% and there is no max 12b1 fee. The total expense ratio is currently at 0.67% per year. Other tickers, which may be offered in institutional account or retirement account or 401k account, may not have these fees and has a lower expense ratio fees such as WFUSX, WUSMX, SMUAX and SMAIX. For ticker, SMAIX, there is no front end sales load and 12b1 fee and only has 0.37% expense ratio per year.

8. Vanguard High Yield Tax Exempt Fund, VWAHX

The Vanguard High-Yield Tax-Exempt fund (VWAHX) seeks to provide a high and sustainable level of current income that is exempt from federal personal income taxes.The fund is actively managed by Christopher W. Alwine since 2009. The majority of the investment about 80% is investment grade rated municipal bonds and small investment about 20% is in junk rated. The fund has returned 6.39% over the past year, 5.22% over the past three years, and 4.65% over the past five years. The fund has a very low annual expense ratio of 0.20%. There is no front end sales load and 12b1 fee for this fund. Another class of ticker which maybe offer to institutional or 401k account, VWALX, has a lower expense ratio of 0.12% only.

9. Fidelity Municipal Income, FHIGX

Fidelity Municipal Income fund seeks high current yield exempt from federal income tax with majority (80%) of assets invest in investment grade municipal bonds. The fund is actively managed by Christine Jones Thompson since 2002. The fund has returned 5.74% over the past year, 5.38% over the past three years, and 4.67% over the past five year. The fund has a low annual expense ratio of 0.48%. There is no front end sales load and 12b1 fee for this fund. There are no other classes for this municipal fund.

10. Legg Mason Western Asset Managed Municipals Fund, SHMMX

Legg Mason WA Managed Municipals (SHMMX) seeks to maximize current interest income exempt from regular federal income tax purposes and the capital preservation. The fund is actively managed by Joseph P. T. Deane since 1988. It currently has a max front end sales load of 4.25% and max 12b1 fee of 0.15%. The total expense ratio is currently at 0.64% per year.Other tickers, which may be offered in institutional account or retirement account or 401k account, may not have these fees and has a lower expense ratio fees such as SMMBX, SMMCX, SMMOX and SMMYX. For ticker, SMMYX & SMMOX, there is no front end sales load and 12b1 fee and only has 0.49% expense ratio per year.

Where can I purchase these mutual funds?

Usually you will need mutual fund providers as well as brokerage to buy these mutual funds. Please check the following providers or brokerages:

  • Vanguard – offer various mutual funds that track indexes as well as ETF for free
  • Scottrade – Offer various mutual funds. 3,000 No load & No Transaction Fees (NTF) fund for free and 15,000 mutual funds as well as trading account for $7.00 per trade. You can buy the American Fund family for free and please select no load fund.
  • Fidelity – one stop shop for mutual fund or ETF as well as cash management banking

Disclosure: I have no affiliation with any of these mutual funds. I also have no positions in any of above funds. Please do your own research for additional details. Please trade and invest responsibly. Past Performance is No Guarantee of Future Results

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Comments 5 comments

LillyGrillzit profile image

LillyGrillzit 6 years ago from The River Valley, Arkansas

I always end up coming back to your Hub several times while reading. I think I have IADD! They can name the new malady after me. I did so poorly in Oceanology because once we were directed to links on the web, I was gone...So, I tweeted, revoted up about 3 times. Liked on fb. If I become wealthy, would you consider being my finance manager?


chan0512 profile image

chan0512 6 years ago from Camarillo, CA Author

@LillyGrillzit,

Thanks! Sure, I will be your finance manager. :)


LillyGrillzit profile image

LillyGrillzit 6 years ago from The River Valley, Arkansas

Good!


Mr Tindle profile image

Mr Tindle 6 years ago

Although, the funds that are mentioned in the above article may be well managed w/ good long-term track records (I don't know, I didn't check), I think investors should be careful with municipal bonds at this time. Many municipalities are in bad financial shape right now. California is one of the best examples, but the country has many more states, cities, countys, and other municipalities that are struggling to make payments, so there is definitely allot of risk and uncertainty with munis.


chan0512 profile image

chan0512 6 years ago from Camarillo, CA Author

Mr Tindle,

Thanks for your input. I agree any investor will need to do their own investing homework/ strategy and try to diversify. The above list is a diversified muni bond fund (i.e. not single muni), so this will provide another way of diversification in muni bond fund.

I also noticed recently most of these municipal bond funds are being liquidated probably due to uncertainty of New US Congress next year. Less money from fed to state etc. Another way to prevent volatility is investing in investment grade municipal bond or short term municipal bond. These muni bond funds are less volatile and still provide better yield than any bank account interest rate.

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