Best ETFs: Tax-Exempt Bonds

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These exchange-traded funds own municipal bonds, with coupons mostly exempt from federal taxation.

Until a few years ago ETFs were a poor choice for investors seeking tax-exempt income. Their expense ratios ate up too large a chunk of your coupons.

That changed in 2015, when cost-conscious Vanguard added a muni-bond offering to its ETF lineup. In 2018 BlackRock responded by slashing the fee on its $9 billion iShares National Muni Bond (MUB). Vanguard deserves praise not just for cutting the costs imposed on its own customers but for inspiring competitors to cut costs imposed on their customers.

The big iShares ETF and its sister fund Short-Term National Muni (SUB) are the cost winners now. MUB and SUB are on our Honor Roll.

This category covers a wide range in maturities, which is to say in interest-rate hazards and yields. To make comparisons on those scores, turn to Morningstar.

But never lose sight of costs. Consider that a portfolio of tax-exempt bonds will yield something like 2.5% and that inflation is something like 2%. Your real return, before expenses, is going to be 0.5%. Knock off 0.5% for expenses, which an expensive muni ETF (not eligible for this survey) will soak you, and you are left with nothing.

National portfolios

Ticker	Exchange-Traded Fund	Holding cost¹	Liquidity score²	Assets ($bil)
		Holding cost¹	Liquidity score²	Assets ($bil)
MUB	iShares National Muni Bond*	$116	A	9.0
SUB	iShares Short-Term National Muni Bd*	121	B	1.5
VTEB	Vanguard Tax-Exempt Bond	149	A	2.7
IBMH	iShares iBonds Sep 2019 Term Muni Bd	303	B	0.3
IBMJ	iShares iBonds Dec 2021 Term Muni Bd	305	C	0.2
IBMI	iShares iBonds Sep 2020 Term Muni Bd	307	C	0.3
IBMG	iShares iBonds Sep 2018 Term Muni Bd	308	C	0.2
IBMK	iShares iBonds Dec 2022 Term Muni Bd	314	C	0.2
IBML	iShares iBonds Dec 2023 Term Muni Bd	323	D	0.1
SHM	SPDR Nuveen Blmbg Barclays ST Muni Bd	327	A	3.7
SMB	VanEck Vectors AMT-Free Short Muni	344	C	0.2
TFI	SPDR Nuveen Blmbg Barclays Muni Bd	376	A	2.8
ITM	VanEck Vectors AMT-Free Interm Muni	394	B	1.7
MEAR	iShares Short Maturity Municipal Bd	416	C	0.1
MLN	VanEck Vectors AMT-Free Long Muni	419	C	0.2
PVI	PowerShares VRDO Tax-Free Weekly	431	D	0.1
PZA	PowerShares National AMT-Free Muni Bd	458	B	1.6
MMIN	IQ MacKay Shields Muncpl Insrd	506	D	0.01
PRB	VanEck Vectors Pre-Refunded Muni	506	F	0.01
MMIT	IQ MacKay Shields Muncpl Intern	508	C	0.03
RVNU	Xtrackers Municipal Infras Rev Bd	551	D	0.1
HYD	VanEck Vectors High-Yield Municipal	568	A	2.5
HMOP	Hartford Municipal Opportunities	590	D	0.01
SMMU	Pimco Short Term Municipal Bond Actv	601	D	0.1
SHYD	VanEck Vectors Short High-Yield Muni	621	D	0.1
MUNI	Pimco Intermediate Municipal Bd Actv	633	D	0.3
HTAB	Hartford Schroders Tax-Aware Bond	663	C	0.02

One-state portfolios

CMF	iShares California Muni Bond	413	B	0.9
NYF	iShares New York Muni Bond	419	C	0.3
PWZ	PowerShares Calif AMT-Free Muni Bd	489	C	0.3
PZT	PowerShares New York AMT-Free Muni Bd	490	D	0.1

*Best ETFs Honor Roll Member

¹ Cumulative cost of holding a $10,000 position for a decade. Incorporates annual expense ratio, bid/ask spreads and cost offset from securities lending. ²Reflects bid/ask spreads and trading volume. A = easy to trade.

Data sources: Morningstar, Bloomberg, fund distributors.

Best ETFs: How we rated 737 funds

Best ETFs: Short-Term Taxable Bonds

Best ETFs: Medium-Term Taxable Bonds

Best ETFs: Long-Term Taxable Bonds

Best ETFs: Junk Bonds

This article was originally published by Forbes.com. Read the original article here.