Municipal Bond Fund
A municipal bond fund is a fund that invests in municipal bonds. The best municipal bond ETFs for the rest of 2020 include the IQ MacKay Shields Municipal Insured ETF, which invests in investment-grade municipal bonds that are covered by an insurance policy guaranteeing principal and interest payments; the Invesco Taxable Municipal Bond ETF, which invests in the (taxable) U.S. dollar-denominated Build America Bonds issued by U.S. states and territories under the 2009 Recovery and Reinvestment Act; and the IQ MacKay Shields Municipal Intermediate ETF, which is primarily invested in investment-grade municipal bonds through an actively managed strategy. Municipal bonds and bond funds are usually exempt from federal taxes, and if they are issued within the state of the purchaser, are also exempt from state taxes. Municipal bond funds invest in municipal bonds, debt instruments issued by state and local governments to help fund capital projects. A municipal bond fund is exempt from state tax if it is comprised of bonds issued primarily in the state of the investor’s residence.
What Is a Municipal Bond Fund?
A municipal bond fund is a fund that invests in municipal bonds. Municipal bond funds can be managed with varying objectives that are often based on location, credit quality, and duration. Municipal bonds are debt securities issued by a state, municipality, county, or special purpose district (such as a public school or airport) to finance capital expenditures. Municipal bond funds are exempt from federal tax and may also be exempt from state taxes.
How a Municipal Bond Fund Works
Municipal bond funds are one of a few investments in the market that offer tax exemption. For investors, they offer yield and can be a good fixed income option for conservative portfolio allocations.
Municipal bond fund holdings vary by the fund’s objective. They are comprised of municipal bonds that offer investors the advantages of municipal bond securities along with diversification against individual issuer risk. Municipal bonds are structured like standard bond investments with coupon payments and a lump sum payment at maturity. Municipal bond funds pay regulator distributions to investors from coupon payments and capital gains. Distributions are determined at the discretion of the fund.
Strategies can vary by location, credit quality, and maturity. Fund companies offer municipal bond funds across the entire credit spectrum. Investment objectives are typically conservative, intermediate, or high yield with consideration for the maturity date.
Municipal Bond Fund Taxes
Municipal bond funds are an attractive option for an investor’s conservative allocation due to their income and tax exemption. They are often sought by high net worth investors in higher tax brackets specifically for their tax exemption advantages.
Funds that primarily invest in municipal bonds are exempt from federal tax and may also be exempt from state tax. A municipal bond fund is exempt from state tax if it is comprised of bonds issued primarily in the state of the investor’s residence.
Municipal Bond Fund Yield
In addition to tax exemption, municipals also offer distributions that make them top investment choices for income investors. Funds pay distributions monthly, quarterly, semi-annually, or annually. A fund’s distributions can be observed by its trailing and forward yield. The trailing yield provides insight on distributions as a percent of the fund’s price over the past twelve months. Forward yield is based on the most recent distribution.
Municipal Bond Fund Investing
The best municipal bond ETFs for the rest of 2020 include the IQ MacKay Shields Municipal Insured ETF, which invests in investment-grade municipal bonds that are covered by an insurance policy guaranteeing principal and interest payments; the Invesco Taxable Municipal Bond ETF, which invests in the (taxable) U.S. dollar-denominated Build America Bonds issued by U.S. states and territories under the 2009 Recovery and Reinvestment Act; and the IQ MacKay Shields Municipal Intermediate ETF, which is primarily invested in investment-grade municipal bonds through an actively managed strategy.
Related terms:
Bond Fund
A bond fund invests primarily in bonds (government, corporate, municipal, convertible) and other debt instruments to generate monthly income. read more
Build America Bonds (BABs)
Build America Bonds were taxable municipal bonds that featured credits and federal subsidies for bondholders and state and local government issuers. read more
Capital Expenditure (CapEx)
Capital expenditures (CapEx) are funds used by a company to acquire or upgrade physical assets such as property, buildings, or equipment. read more
Capital Gain
Capital gain refers to an increase in a capital asset's value and is considered to be realized when the asset is sold. read more
Credit Quality
Credit quality is one of the principal criteria for judging the investment quality of a bond or a bond mutual fund. read more
Debt Security
A debt security is a debt instrument that has its basic terms, such as its notional amount, interest rate, and maturity date, set out in its contract. read more
Housing Authority Bonds
A housing authority bond is issued by a state or local government to finance the construction or the rehabilitation of affordable housing, or to help low-income individuals buy a home. read more
Municipal Bond
A municipal bond is a debt security issued by a state, municipality or county to finance its capital expenditures. read more
Public Purpose Bond
A public purpose bond is used by municipalities to finance public works as opposed to private purpose bonds. read more
Taxable Municipal Bond
A taxable municipal bond is a fixed-income security issued by a local government to finance projects that the federal government will not subsidize. read more