Municipal Bond Funds: A Comprehensive Guide

Municipal Bond Funds: A Comprehensive Guide

4 Min.

This guide provides an in-depth understanding of municipal bond funds, including their meaning, tax advantages, investment strategies, and top-performing ETFs in 2022.


A municipal bond fund is an investment vehicle that primarily invests in municipal bonds. These funds are managed with various objectives, typically based on factors like location, credit quality, and duration. Municipal bonds are debt securities issued by governmental entities, such as states, municipalities, counties, and special purpose districts, to raise funds for capital projects. Investors are drawn to municipal bond funds due to their federal and, in some cases, state tax exemption.

Composition and Investment Strategies

Municipal bond funds offer tax-exempt income and can serve as a stable component of a conservative investment portfolio. The composition of a municipal bond fund's holdings depends on its specific investment objectives. They typically consist of municipal bonds, which share characteristics with standard bonds, including coupon payments and a final lump-sum payment upon maturity. Municipal bond funds distribute earnings to investors through coupon payments and capital gains, with distributions determined at the fund manager's discretion. These funds offer diversification, reducing the risk associated with individual bond issuers.

The investment strategies of municipal bond funds can vary based on location, credit quality, and maturity. Fund companies offer a range of options across the credit spectrum, with investment objectives typically categorized as conservative, intermediate, or high yield while considering the maturity date.

Municipal Bond Fund Taxes

Municipal bond funds are particularly attractive to investors in higher tax brackets due to their income and tax exemption benefits. Funds that primarily invest in municipal bonds are exempt from federal taxes and may also be exempt from state taxes, provided that they are comprised of bonds issued primarily within the investor's home state.

Municipal Bond Fund Yield

In addition to their tax advantages, municipal bond funds offer regular income distributions, making them a popular choice for income-focused investors. These funds typically pay distributions on a monthly, quarterly, semi-annual, or annual basis. Two key measures help assess a fund's income potential:

  • Trailing Yield: This figure represents distributions as a percentage of the fund's price over the past twelve months, providing insight into historical income.
  • Forward Yield: This measure is based on the most recent distribution and serves as an indicator of anticipated future income.

Municipal Bond Fund Investing

Investors looking to capitalize on the advantages of municipal bond funds may consider top-performing exchange-traded funds (ETFs) in 2022. Below are three notable options:

  1. Invesco VRDO Tax-Free ETF (PVI)
    The Invesco VRDO Tax-Free ETF focuses on U.S. dollar tax-exempt variable rate demand obligations (VRDOs). These bonds offer tax-free interest income, and PVI tracks their performance.
  2. iShares iBonds Dec 2022 Term Muni Bond ETF (IMBK)
    The iShares iBonds Dec 2022 Term Muni Bond ETF follows the S&P AMT-Free Municipal Series Dec 2022 Index, which comprises investment-grade U.S. municipal bonds maturing between December 31, 2021, and December 2, 2022. IMBK is designed for investors seeking to align their investments with a specific maturity date.
  3. Invesco BulletShares 2022 Municipal Bond ETF (BSMM)
    The Invesco BulletShares 2022 Municipal Bond ETF offers a similar investment profile to IMBK but with a lower dividend yield. It is suitable for investors who prioritize lower income potential while maintaining exposure to municipal bonds.



Municipal bond funds offer a unique blend of tax advantages and income potential. Investors can tailor their portfolios to their financial goals by choosing funds that align with their investment objectives. In 2022, the Invesco VRDO Tax-Free ETF, iShares iBonds Dec 2022 Term Muni Bond ETF, and Invesco BulletShares 2022 Municipal Bond ETF stood out as top-performing options in this asset class. Understanding the nuances of municipal bond funds and their tax benefits can empower investors to make informed decisions and achieve their financial objectives.

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