One of the only downsides to passive income from stocks and bonds is that the revenue generated from those investments is subject to federal and state income tax. The significant advantage of owning municipal bonds is that the interest from municipal bonds is usually exempt from federal taxes and sometimes from state and local taxes. State and local governments issue municipal bonds to finance public projects and services.
Unlike open-end mutual funds, exchange-traded funds (ETFs) trade on major exchanges like stocks. They own financial assets such as stocks, bonds, currencies, debts, futures contracts, and commodities such as gold bars. One massive advantage ETFs have is that they can be bought or sold anytime the markets are trading. In addition, there is a large market and demand from investors for municipal bond exchange-traded funds. Some are national funds that own bonds from all over the United States, and some are state funds that only own the bonds from their specific state.
Investors looking to generate $1,000 or more monthly in tax-free income would need approximately $160,000 to invest in high-yielding leverage municipal bond ETFs. These funds use borrowed money to buy additional bonds, increasing the potential for higher returns. However, leverage also significantly increases the risk of loss when rates increase dramatically. Experienced portfolio managers can use leverage to help investors maximize tax-exempt income and total returns.
We selected eight national high-yielding municipal bond ETFs. All of these trade below net asset value, which means the price of the funds is less than the value of the bonds in the fund. By investing $20,000 in each fund, investors can generate at least $1000 per month in tax-free income. The funds are offered and run by companies with a long history of success in the municipal bond industry. As a caveat, these ETFs are better suited for those with much higher risk tolerance.
Why we recommend municipal bond ETFs
Municipal bond ETFs are generally free from federal and state taxes if they hold only tax-exempt bonds. However, if the municipal bond ETF has a combination of tax-free and taxable interest, taxes may be due at the federal and state levels. Here are the eight high-yielding national municipal bond exchange-traded funds to deliver over $1,000 monthly tax-free income.
DWS Municipal Income Trust (NYSE: KTF)
- 7.75% yield
- 32.16% leverage
- Net asset value $9.81–3.67% discount
Invesco Advantage Municipal Income Trust II (NYSE: VKI)
- 7.68% yield
- 36.19% leverage
- Net asset value $9.44–7.42% discount
Invesco Municipal Trust (NYSE: VKQ)
- 7.71% yield
- 35.03% leverage
- Net asset value $10.58–7.56% discount
Invesco Value Municipal Income Trust (NYSE: IIM)
- 7.75% yield
- 32.28% leverage
- Net asset value $11.94–8.15% discount
Nuveen Municipal Credit Income Fund (NYSE: NZF)
- 7.72% yield
- 39.94% leverage
- Net asset value $12.25–6.58% discount
Nuveen Quality Municipal Income Fund (NYSE: NAD)
- 7.78% yield
- 41.20% leverage
- Net asset value $11.64–7.40% discount
RiverNorth Flexible Municipal Income Fund (NYSE: RFM)
- 8.70% yield
- 39.08% leverage
- Net asset value $15.25–9.11% discount
RiverNorth Opportunistic Municipal Income Fund (NYSE: RMI)
- 8.51% yield
- 38.84% leverage
- New asset value $15.46–8.36% discount
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