Examining preferred Bond funds amidst the volatile impact of tariffs
Amidst ongoing market volatility, municipal bond exchange-traded funds (ETFs) have demonstrated remarkable resilience and stability. This is evident in the performance of the Invesco BulletShares 2031 Municipal Bond ETF (BSMV), which boasted a 3-month return of 2.18%, outperforming its category average of 0.98%.
The appeal of municipal bond ETFs for high-earning investors is undeniable, particularly due to their tax benefits. For instance, the Vanguard Tax-Exempt Bond (VTEB) fund offers a 3.9% yield, equivalent to more than 5.1% for investors in the 24% tax bracket. This makes municipal bonds a lucrative choice for high-income earners, as dividends from these ETFs are generally exempt from federal income tax.
Several factors contribute to the attractiveness of municipal bond ETFs. Firstly, their tax efficiency enhances their yield for high-earning investors. Secondly, municipal bonds are known for their stability, especially in times of economic uncertainty. Thirdly, the municipal bond market benefits from robust state finances, including record-high rainy-day funds. Fourthly, current market conditions maintain a supportive environment for fixed-income investments.
However, the municipal bond sector has faced challenges, such as a notable increase in muni-bond issuance in the first quarter of 2025 and reduced demand. Despite these technical hurdles, the fundamentals of the municipal bond market remain strong, with record-high state rainy-day funds and robust balance sheets.
Paul Malloy, head of municipals at Vanguard, emphasises that the current market condition offers high-earning investors a chance to capitalise on attractive yields while benefiting from the stability and resilience of municipal bonds. Notably, the Kiplinger ETF 20, a group of six bond funds, returned 5.5% over the past 12 months through the end of May. All but one bond ETF in the Kiplinger ETF 20 beat the index.
It's worth mentioning that the SPDR DoubleLine Total Return Tactical (TOTL), the Invesco BulletShares 2026 Corporate Bond (BSCQ) and the Fidelity Total Bond (FBND) funds also performed well in the group. However, the Vanguard Tax-Exempt Bond (VTEB) fund trailed the Agg and the rest of the Kiplinger ETF 20 bond funds over the past year. The Invesco Senior Loan ETF (BKLN) and the iShares Short Duration Bond Active ETF (NEAR) led the returns among the funds.
These findings were first published in Kiplinger Personal Finance Magazine. It's crucial to note that concerns about adding trillions to the country's debt and inflationary effects of tariffs have pushed bond yields higher, which may influence the performance of municipal bond ETFs in the future. Nonetheless, the resilience and stability of municipal bond ETFs make them a compelling choice for those seeking consistent income amidst market volatility.
Investing in municipal bond ETFs, like the Vanguard Tax-Exempt Bond (VTEB) fund, provides a lucrative opportunity for high-income earners due to their tax benefits and stability, as demonstrated by their strong performance in ongoing market volatility. Furthermore, the appeal of these ETFs for personal-finance management stems from their tax efficiency, market stability, robust state finances, and current market conditions favorable to fixed-income investments.
