Noteworthy Municipal-Bond Funds
These offerings provide tax-efficiency for the income-minded investor.
These offerings provide tax-efficiency for the income-minded investor.
For the income-oriented, tax-conscious investor, municipal-bond funds have long been a compelling investment option. But the asset class began bleeding assets in late 2010 and has continued to do so in 2011, spurred on by interest-rate jitters and negative headlines about municipal finances.
True, not all munis are safe, but investors can take steps to reap the tax-free income that most munis deliver while also cushioning on the downside.
Diversification has been called investing's only free lunch, so one way to put a damper on risk is to take a pass on state-specific muni bonds and funds and instead invest in a muni fund with exposure to high-quality bonds from all throughout the United States. With that universe as a starting point, we turned to the Premium Fund Screener to layer on other additional criteria to unearth some topnotch municipal offerings that keep a lid on volatility.
First, we called up distinct portfolios of both short-term and intermediate-term national municipal-bond funds that are open to new investments. On the fees front, we looked for no-load funds with expenses below 0.5%, which is roughly the cutoff for the cheapest quartile of funds within those categories.
We also applied a stress-test for performance, focusing on funds that rank in the top quartile of their peer group for the five-year period. To home in on funds that have done a good job managing volatility, we layered on a screen of three-year standard deviations that fall below the category average.
Below, we've highlighted several of the screen's results, and Premium members can click here to replicate the screen.
American Century Intermediate Term Tax-Free Bond (TWTIX)
Manager Steve Permut and his team aim for safety by maintaining the bulk of the portfolio in issues that are rated AA or AAA and keeping a tight rein on duration. True, management is not shy about pursuing midquality credits when prices look attractive, but the fund's tilt toward high quality helped cushion results in 2008's credit crisis. A 0.49% expense ratio makes it among the cheapest in its category and means that management doesn't have to take on significant risk to deliver peer-beating results.
Fidelity Short-Intermediate Municipal Income (FSTFX)
This Analyst Pick run has produced terrific long-term returns with consistently low volatility. Manager Mark Sommer avoids interest-rate bets, but he recently kept extra cash on hand; that came in handy when investors pulled money from this and other muni offerings in late 2010 and early this year. Armed with a disciplined process and powerful analytical resources (including some that help measure the liquidity of the fund's holdings), Sommer and his team have managed to deliver a smooth ride. This is a solid choice for patient, conservative investors over the long-haul.
Vanguard Limited-Term Tax-Exempt (VMLTX)
While this municipal short-term fund hasn't been immune to the negative headlines that have recently roiled the muni market, its low interest-rate sensitivity has limited its losses relative to the category average. Moreover, the fund has a meaningfully higher stake in the highest-rated AAA and AA bonds than its peers and also avoids leverage and derivatives. Despite these risk-control measures, the fund has still managed to deliver a competitive return to investors. Although the fund is not without risk, given that yields on short-term munis are still in the basement and the bonds could struggle if yields tick up, Morningstar fund analyst Andrew Gogerty notes that the fund's long-term appeal is still intact.
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