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Seaworthy High-Yield Muni Funds

These funds have held up in tough times and delivered over the long haul.

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Government debt is on the minds of many investors these days, whether it's the budget deficits of Greece and other European governments, the U.S. government, or California. At first glance, the debt burdens governments face today make the prospect of owning municipal bonds daunting.

But a well-managed muni-bond fund can mitigate default risks. Furthermore, it could be argued that the sizable yield premium that munis provide over Treasuries these days (on a tax-adjusted basis) compensates for those risks. In particular, high-yield muni bonds can be a good source of income in a low-yield environment. (The typical fund in that category recently sported a 30-day yield of 5.2%.) Finally, the potential for income taxes to increase in order to help offset rising deficits adds to muni bonds' appeal. Of course, these funds do take on credit risk, usually staking more than half of assets in bonds rated BBB or below (including nonrated bonds), so they should play only a limited role in a well-diversified portfolio.

One way to find solid high-yield muni funds is by using Morningstar's  Premium Fund Screener. We searched for high-yield muni funds in which the skippers have been on board for at least five years and have outpaced 75% of their peers over five years. We looked for those that held up better than their typical category peer in 2008's credit crunch for proof of a moderate approach. We also screened for funds with below-average expense ratios--particularly important in a relatively low-yield environment. And as usual, we looked for distinct funds that are open to new investors, require a minimum initial outlay of $10,000 or less, and are covered by Morningstar's fund analysts.

Greg Carlson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.