Fidelity Focused Stock (FTQGX) has been a very strong performer. Stephen DuFour has managed Fidelity...
Two Favorite Muni Funds
02/12/2015 9:00 am EST
The $3.6 trillion muni-bond market posted its longest string of monthly gains in more than two decades last year, returning nearly 9% in 2014. And that solid performance is expected to run into 2015, explains Benjamin Shepherd, editor of Personal Finance.
This is because the supply of muni bonds remains limited and the passage of a tax-reform bill that would limit their federal income tax exemption seems extremely unlikely after the midterm elections.
Our favorite muni fund, by far, is Vanguard High-Yield Tax-Exempt (VWAHX), which returned 11.6% last year to rank at the top of the intermediate-term municipal-bond category.
Despite its high yield moniker, nearly 77% of its assets are devoted to bonds rated A or higher, with an average rating of BBB.
More than a quarter of its bond holdings are related to transportation projects backed by revenues from toll roads or federal highway funds. Its next largest stakes are in health and education bonds, at 15.4% and 10.1% of assets, respectively.
Manager Mathew Kiselak has also been reducing the fund’s average duration—a measure of interest rate sensitivity—taking it down to 6.1 years.
That basically means that for each 1% increase in the Fed rate, you can expect the fund’s value to decline by about 6.1%.
Kiselak has racked up an impressive record since joining in 2010, supported by Vanguard’s extensive brain trust. The fund ranks in the top 3% of its category over the past five years and is the second best performer over the past decade.
With a taxable equivalent yield of 6.3% for those in the highest tax bracket, Vanguard High-Yield Tax-Exempt is one of the best municipal-bond mutual funds available.
For those worried that interest rates might rise sooner rather than later, you should consider US Global Investors Near-Term Tax-Free (NEARX).
With an average duration of 1.9 years, it is one of the shortest-maturity municipal funds available. It also happens to be one of the cheapest, with an annual expense ratio of 0.45%.
The icing on the cake is its monthly distributions, rather than the more common quarterly payouts. Its trailing 12-month yield is 2.1%.
Much like our Vanguard holding, US Global Investors Near-Term Tax-Free holds nearly three quarters of its assets in bonds rated A or better.
The fund’s management team has been in place since 1999 and has amassed a terrific track record. Ranking in the top third of its category over the trailing 15-year period, it falls in the top 18% over the past decade and the top 12% over the past year.
Making monthly distributions with limited interest rate risk, US Global Investors Near-Term Tax-Free is a great source of tax-advantaged income.
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