In a year with incredible volatility in both equity and fixed-income markets and with the Barclays U.S. Aggregate Bond Index up a paltry 0.88% for the year to date through November, municipal bonds and the funds investing in them have offered decent returns, especially after tax savings are considered. The exhibit below shows the returns for the closed-end and open-end municipal national long Morningstar Categories for the year to date and over the trailing one- and three-year periods through November. Most municipal CEFs fall in the long category because the leverage used by those funds extends the portfolios' durations past Morningstar's cutoff between intermediate and long bond categories. More open-end funds fall into the shorter municipal-bond categories (intermediate and short term), but the more than 50 open-end funds makes for a decent comparison against the 80-plus CEFs in the long category.
For the year to date through November, the average CEF gained nearly 4% on net asset value and 5% on share price while the average open-end fund gained over 2%. That's better than the Barclays Municipal Total Return Index's 2.6% gain, much better than the Aggregate Index's 88-basis-points gain, and without taking the tax advantages of municipal bonds into account. The average fund (both CEF and open-end) outpaced the Aggregate Index over the trailing three years as well.
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Cara Esser does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.