Tax Free Bond Funds

[retired1]

I'm looking to add Tax Free Bond Funds in my Taxable account with low expense ratio & higher return (of course ). Online search brings below top funds. Anybody has any advice ?

1. T. Rowe Price Tax-Free High Yield PRFHX 4.15
2. American High-Income Municipal Bond A AMHIX 4.78
3. Vanguard High-Yield Tax-Exempt VWAHX 4.23
4. BlackRock Strategic Muni Opps Instl MAMTX 4.09
5. Nuveen Hig Yield Tax Exempt

 

[JPatrick]

I've held VWAHX for several years and am quite satisfied. It was at the top of the pack when I did my initial research and it remains a strong holding today.

 

[njhowie]

Be careful with the duration of any bond fund you are currently in. If it's a long term (muni) fund, seriously consider reducing the allocation and increasing the allocation in a short-term (muni) bond fund.

Even better, if your portfolio is sufficiently large, just buy the municipal bonds directly. There is less risk (in my view) than with a fund.

 

[TwoByFour]

High yield = high risk. They boost the yields by having a lot of bonds with low credit rating, perhaps even junk bonds. You can expect the fund to get trashed in a recession, and probably some defaults which translates to permanent loss of value. All of that seems to fly in the face of the purpose for Fixed Income, which is stability and low risk. If you're willing to take on that risk, why not do it with equities? The yield will be much higher with the same risk. Or buy a higher quality muni fund like VWITX.

 

[audreyh1]

High yield = high risk. They boost the yields by having a lot of bonds with low credit rating, perhaps even junk bonds. You can expect the fund to get trashed in a recession, and probably some defaults which translates to permanent loss of value. All of that seems to fly in the face of the purpose for Fixed Income, which is stability and low risk. If you're willing to take on that risk, why not do it with equities? The yield will be much higher with the same risk. Or buy a higher quality muni fund like VWITX.

Yep. Right on.

 

[RockyMtn]

Vanguard has an intermediate term muni fund as well. Duration about 7 years. High yield equals high risk!

 

[scrabbler1]

I have been in national muni bond funds and home-state muni bond funds since 1990. The latter's monthly dividend income is exempt from state income taxes, too. One I have with Dreyfus, the other with Fidelity.


I have been in intermediate-term and long-term bond funds. The former's NAV doesn't bounce around as much but its return is a little lower than the latter's.


I was never aware of high yield muni bond funds because states and localities always strive to keep their bond ratings at least investment grade or else they would get shut out of these popular bond funds.


Back in late 2008 after I cashed out my company stock upon leaving my company and starting my ER, I saw the bond fund prices drop not so much because they were riskier but more because the demand for these funds had declined so much. Nobody had any money to buy into them. I have a WSJ article from November of 2008 describing this.

 

[brewer12345]

Skip the high yield offerings. As for standard munis, a bit of math vs. treasuries. Treasuries are state and local income tax free, while muni yields seem awfully low for what you are getting.

 

[gerntz]

I have been in national muni bond funds and home-state muni bond funds since 1990. The latter's monthly dividend income is exempt from state income taxes, too. One I have with Dreyfus, the other with Fidelity.


I have been in intermediate-term and long-term bond funds. The former's NAV doesn't bounce around as much but its return is a little lower than the latter's.


I was never aware of high yield muni bond funds because states and localities always strive to keep their bond ratings at least investment grade or else they would get shut out of these popular bond funds.


Back in late 2008 after I cashed out my company stock upon leaving my company and starting my ER, I saw the bond fund prices drop not so much because they were riskier but more because the demand for these funds had declined so much. Nobody had any money to buy into them. I have a WSJ article from November of 2008 describing this.

I have a home state muni bond ladder with close to 10% of our investable assets. Fed/state tax free & help keep our MAGI down vs. taxable bonds. What their price is at any one time is pretty immaterial when you hold to maturity.

 

[gerntz]

Skip the high yield offerings. As for standard munis, a bit of math vs. treasuries. Treasuries are state and local income tax free, while muni yields seem awfully low for what you are getting.

What we're getting is higher after tax income than with taxable bonds.

 

[Montecfo]

Nuveen Muni Value. Have held a long time and been very satisfied. No leverage. Symbol NUV, it's a closed-end fund.

 

[LiveBelowMeans]

Check out Pimco’s PMF. Pays over 5%. Jmho

 

[audreyh1]

What we're getting is higher after tax income than with taxable bonds.

Same here.

 

[Mr._Graybeard]

Be sure to check the holdings if you are shopping for a home-state tax-exempt fund. It's not uncommon for them to hold a lot of paper from Puerto Rico, Guam and the Virgin Islands. I recently looked at a home-state fund that was over 18% invested in those areas.

 

[gerntz]

Be sure to check the holdings if you are shopping for a home-state tax-exempt fund. It's not uncommon for them to hold a lot of paper from Puerto Rico, Guam and the Virgin Islands. I recently looked at a home-state fund that was over 18% invested in those areas.

How funds with holdings of bonds outside the single state are considered single state funds escapes me. Seems to not be true in advertising.

 

[Mr._Graybeard]

How funds with holdings of bonds outside the single state are considered single state funds escapes me. Seems to not be true in advertising.

Many "commonwealth" bonds are exempt from state income tax, so they're fair game for fund managers seeking double tax exemption. They also generally offer high yields, since their credit ratings are bad to very bad.

I parked some money in one of these funds about 20 years ago, thinking it was a safe place for a short term. Boy, was I wrong.

 

[LOL!]

What does "top funds" actually mean in the first post? Does it mean funds that will lose the most money? Or funds that pay the highest yield right now?

Nothing wrong with tax-exempt muni funds in taxable. What state do you live in? If there is a state-tax-free fund, then that may be better for you as long as not all your bond funds are that one fund.

 

[TwoByFour]

One thing to watch out for with Muni bond funds is AMT. Some muni bonds are classified as private activity bonds which are subject to AMT. There are several muni bond funds that will avoid PA bonds and these are sold as "AMT Free Muni Funds". That does not mean that any muni fund that is not AMT Free will have PA bonds in it, just that they won't guarantee that they won't. The latter is true for Vanguard's VWITX, which is pretty popular, is not AMT Free, but last I looked had no PA bonds in it. Yields are higher for PA bonds, so you are more likely to encounter them in high yield muni bond funds. Obviously most of us would just as soon not get thrown into AMT when we do our taxes.

 

[audreyh1]

One thing to watch out for with Muni bond funds is AMT. Some muni bonds are classified as private activity bonds which are subject to AMT. There are several muni bond funds that will avoid PA bonds and these are sold as "AMT Free Muni Funds". That does not mean that any muni fund that is not AMT Free will have PA bonds in it, just that they won't guarantee that they won't. The latter is true for Vanguard's VWITX, which is pretty popular, is not AMT Free, but last I looked had no PA bonds in it. Yields are higher for PA bonds, so you are more likely to encounter them in high yield muni bond funds. Obviously most of us would just as soon not get thrown into AMT when we do our taxes.

This used to be a concern for us, but no longer. We are no longer subject to AMT.

For many folks now, AMT thresholds (well, specifically the phaseout threshold) are so high that 96% of folks who were subject to AMT in 2017, are not subject in 2018. Until the current tax law sunsets anyway.

 

[TwoByFour]

This used to be a concern for us, but no longer. We are no longer subject to AMT.

For many folks now, AMT thresholds (well, specifically the phaseout threshold) are so high that 96% of folks who were subject to AMT in 2017, are not subject in 2018. Until the current tax law sunsets anyway.

You're right, the exemption has gone up this year. I didn't realize that. We have a lot of cap gains so we have hovered near the exemption in past years.

 

[audreyh1]

You're right, the exemption has gone up this year. I didn't realize that. We have a lot of cap gains so we have hovered near the exemption in past years.

We’ve paid AMT for a long time due to most of our income being from capital gains and qualified dividends. But this year the AMT phaseout threshold has been raised to $1 million MFJ, which means we no longer see an AMT exemption driven down close to zero by the phaseout, but can use the full AMT exemption against our much lower ordinary income.

 

[retired1]

What does "top funds" actually mean in the first post? Does it mean funds that will lose the most money? Or funds that pay the highest yield right now?

Nothing wrong with tax-exempt muni funds in taxable. What state do you live in? If there is a state-tax-free fund, then that may be better for you as long as not all your bond funds are that one fund.

I live in IL. I'm only concerned with income (i.e. interest) aspect of the MUNI bond funds and don't sell any shares I own. I'm OK if total value goes down/up as long as the SEC Yield is high. I own ORNAX & VWALX and very happy with it. MUNI is about 5% of my portfolio.

 

[njhowie]

I live in IL. I'm only concerned with income (i.e. interest) aspect of the MUNI bond funds and don't sell any shares I own. I'm OK if total value goes down/up as long as the SEC Yield is high. I own ORNAX & VWALX and very happy with it. MUNI is about 5% of my portfolio.

Morningstar indicates that ORNAX has a 4.75% front-end load - are you paying that?

Also, ORNAX has about 13% of its holdings in Puerto Rico munis, about 60% of the portfolio with maturity 20+ years out, and 80% 15+ years out - that's some high risk stuff you've got there. However, at only 5% of your portfolio between that and VWALX, it won't be too painful when long term rates move higher.

 

[TwoByFour]

I live in IL. I'm only concerned with income (i.e. interest) aspect of the MUNI bond funds and don't sell any shares I own. I'm OK if total value goes down/up as long as the SEC Yield is high. I own ORNAX & VWALX and very happy with it. MUNI is about 5% of my portfolio.

When the value of the fund goes down, the SEC yield goes up, but your interest income may not change at all, or may even go down. Just be aware of that. SEC yields don't translate well to actual interest income. You could just track the distributions, not the yield.

 

[retired1]

Morningstar indicates that ORNAX has a 4.75% front-end load - are you paying that?

Also, ORNAX has about 13% of its holdings in Puerto Rico munis, about 60% of the portfolio with maturity 20+ years out, and 80% 15+ years out - that's some high risk stuff you've got there. However, at only 5% of your portfolio between that and VWALX, it won't be too painful when long term rates move higher.

I bought B Shares directly from Oppenheimer so no, never paid front end load. Also I noticed that Fidelity & Schwab don't charge front-end load on many bond funds that otherwise have front-end loads. I've owned ORNAX since 2000 and drawing monthly check w/ consistent return. So far so good