Jeremy Glaser: With interest rates rising, many muni bond investors are getting nervous. We talked to our analysts to share three of their favorite muni bond funds they think will help ease some of these jitters.
Beth Foos: Funds in Morningstar's muni National Short category generally take on less interest-rate risk than the typical national muni bond fund. Because of this, they are less likely to see a significant impact on returns if interest rates rise. Investors that are interested in tax efficiency as well as being concerned for rising interest rates are well served by taking a look at this category.
One of our favorites in this group is T Rowe Price's Tax-Free Short-Intermediate Term Bond Fund. It's run by an experienced team with a deep bench, and it's offered at a competitive price. Manager Charlie Hill generally keeps the duration of this portfolio within 10% of it's benchmark, which is the Bloomberg Barclays 1 to 5 year blend. That means that the end of 2017, this fund's duration was roughly three years. He doesn't use a lot of tools that add to volatility such as leverage, and he doesn't load up on a significant amount of bonds that are rated below investment grade. Instead, he relies on solid sector allocation as well as the individual bond picks of his muni team to find pockets of value in the muni market. This has led to above average performance over the past decade and contributes to Morningstar's Analyst Rating of Gold.
Emory Zink: Silver-rated Vanguard Limited Term Tax Exempt Municipal Bond Fund exhibits a number of characteristics that make it resilient in the face of rising interest rates. First its duration is managed close to the head of its index, the Bloomberg Barclays 1 to 5 Municipal Index Benchmark, which means that the team issues aggressive interest-rate calls as a source of return. Second, the fund skews higher quality than its typical peer, which means that should dampen volatility. Third, the fund has one of the lowest fees in its category. It has a much lower performance hurdle to overcome than many of its peers. All three of its characteristics should help it in the face of rising interest rates.
Brian Moriarty: Nuveen Limited Term Municipal Bond Fund is a good choice for muni investors that are concerned about rising interest rates. This fund, which tends to be a little bit more aggressive than short-term municipal bond peers is good for investors that want to take some rate risk off the table but still leave room for total return potential. For example, the fund's duration is about three years, which is significantly shorter than the five-year average duration on intermediate-term municipal bond funds, but still a bit longer than the two year average on other short-term muni bond funds. It is also comfortable with credit risk. It holds both tobacco bonds and bonds issued by Chicago and Illinois, but over 90% of assets are still rated investment grade. Over the long term, this strategy has worked. Over the trailing 10 and 15 year periods, it has beaten more than 80% of peers.