Elizabeth Foos
Elizabeth Foos, associate director of fixed-income strategies for Morningstar, Inc., Chicago, which tracks 530,000 investment offerings. Morningstar.com
Fixed-income investors looking for high yields may want to peruse the riskier segment of the municipal (muni) bond market. Lower-quality bonds, issued by turnpike authorities, hospitals and other state and local entities, have rallied since the 2022 bond bear market and still look attractive. In general, munis are free of federal taxes (and, in some cases, state taxes). So while a muni may have a lower yield than a corporate, the after-tax yield of the corporate may be even lower than that of the muni. High-yield munis also have similar default rates as investment-grade corporate bonds. Caveat: Because the market is small, investors should stick with actively managed mutual funds with consistent strategies, such as…
American High-Income Municipal Bond Fund (ABHFX). This aggressive fund, offered through financial advisors and retirement plans, is available no-load at some brokerage firms. About 55% of assets are in unrated or below-investment-grade muni bonds. Recent yield: 3.74%, which, for investors in the 37% federal tax bracket, is equivalent to a yield of 5.9% on a corporate bond. Annualized performance: 3.67%.*
T. Rowe Price Tax-Free High-Yield Fund (PRFHX) has 40% of assets in below-investment-grade and unrated bonds. Recent yield: 3.65% (equivalent to a 5.8% yield on a corporate bond). Annualized performance: 3.22%.
Vanguard High-Yield Tax-Exempt Fund (VWAHX) keeps about 25% of assets in below-investment-grade or unrated bonds. It has a low expense ratio of 0.17%. Recent yield: 3.57% (equivalent to a 5.7% yield on a corporate bond). Annualized performance: 3.32%.
*All fund performance figures are for 10 years annualized through April 15, 2024.
