One of the only downsides to passive income from stocks and bonds is that the revenue generated from those investments is subject to federal and state income tax. The significant advantage of owning municipal bonds is that the interest from municipal bonds is usually exempt from federal taxes and sometimes from state and local taxes. State and local governments issue municipal bonds to finance public projects and services.
Unlike open-end mutual funds, exchange-traded funds (ETFs) trade on major exchanges like stocks. They own financial assets, including stocks, bonds, currencies, debt, futures contracts, and commodities such as gold bars. One significant advantage of ETFs is that they can be bought or sold at any time the markets are trading. Additionally, there is a substantial market and demand from investors for ETFs that track municipal bonds. Some are national funds that own bonds from all over the United States, while others are state funds that only own bonds from their specific state.
Investors looking to generate almost $1,100 monthly in tax-free income would need approximately $160,000 to invest in high-yielding leveraged municipal bond ETFs. These funds use borrowed money to purchase additional bonds, thereby increasing the potential for higher returns. However, using leverage also significantly increases the risk of loss if interest rates rise sharply. Experienced portfolio managers use leverage to help investors maximize tax-exempt income and total returns. With rates at their highest levels in years and the prospect of cuts later this year, the risk-reward for this is much better now.
We selected eight national high-yielding municipal bond ETFs. They all trade below net asset value, which means the price of each fund is less than the value of the bonds it holds. By investing $20,000 in each fund, investors can generate $1,080 per month in tax-free income. The funds are offered and run by companies with a long history of success in the municipal bond industry. As a caveat, these ETFs are better suited for those with a much higher risk tolerance. Pricing, yields, and net asset values are all as of the time of writing this post and may be somewhat higher or lower when published.
Why We Recommend Municipal Bond ETFs
Municipal bond ETFs are generally free from federal and state taxes if they hold only tax-exempt bonds. However, if the municipal bond ETF has a combination of tax-free and taxable interest, taxes may be due at the federal and state levels. Here are the eight high-yielding national municipal bond exchange-traded funds to deliver almost $1,100 monthly tax-free income.
DWS Municipal Income Trust
- DWS Municipal Income Trust (NYSE: KTF)
- 8.25% yield
- 36.16% leverage
- Net asset value $9.04, 1.99% discount
- $20,000 buys 2,255 shares, which pays $137 per month
Invesco Advantage Municipal Income Trust II
- Invesco Advantage Municipal Income Trust II (NYSE: VKI)
- 8.18% yield
- 37.38% leverage
- Net asset value $8.83, 6.39% discount
- $20,000 buys 2,435 shares, which pays $136 per month
Invesco Municipal Trust
- Invesco Municipal Trust (NYSE: VKQ)
- 8.19% yield
- 36.11% leverage
- Net asset value $9.85, 6.60% discount
- $20,000 purchases 2,175 shares, which delivers $137 each month
Invesco Value Municipal Income Trust
- Invesco Value Municipal Income Trust (NYSE: IIM)
- 7.95% yield
- 32.28% leverage
- Net asset value $12.19, 4.51% discount
- $20,000 buys 1,720 shares, paying $133 each month
Nuveen Municipal Credit Income Fund
- Nuveen Municipal Credit Income Fund (NYSE: NZF)
- 8.08% yield
- 41.72% leverage
- Net asset value $12.28, 3.91% discount
- $20,000 buys 1,695 shares, generating $135 each month
Nuveen Quality Municipal Income Fund
- Nuveen Quality Municipal Income Fund (NYSE: NAD)
- 8.14% yield
- 42.85% leverage
- Net asset value $11.70, 4.87% discount
- $20,000 buys 1,797 shares, which pays $136 every 30 days
RiverNorth Flexible Municipal Income Fund
- RiverNorth Flexible Municipal Income Fund (NYSE: RFM)
- 8.02% yield
- 39.08% leverage
- Net asset value $15.46, 9.06% discount
- $20,000 purchases 1,425 shares, which pays $134 per month
RiverNorth Opportunistic Municipal Income Fund
- RiverNorth Opportunistic Municipal Income Fund (NYSE: RMI)
- 7.84% yield
- 41.61% leverage
- Net asset value $15.58, 7.21% discount
- $20,000 buys 1,383 shares, paying out $131 every 30 days
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