The 10-year Treasury yields 4.43%, which sounds competitive until a high earner runs it through the tax screen. At the top federal marginal rate of 37% plus the 3.8% net investment income tax, the after-tax yield collapses to roughly 2.6%. Add state income tax in California, New York, or New Jersey, and the real take-home falls further. Three municipal bond ETFs are absorbing flows that used to head into Treasuries: the iShares National Muni Bond ETF (NYSEARCA:MUB | MUB Price Prediction), the VanEck High Yield Muni ETF (NYSEARCA:HYD), and the SPDR Nuveen Bloomberg High Yield Municipal Bond ETF (NYSEARCA:HYMB).
Each fund delivers tax-equivalent yields above 4% for top-bracket investors, and the two high-yield options yield over 4% tax-free. The question is which fund matches the investor’s tolerance for credit and duration risk.
Why the Tax Math Matters More Than the Headline Yield
For tax year 2026, the top federal bracket is 37% kicks in above $640,600 for single filers and $768,700 for married couples filing jointly. The 3.8% NIIT stacks on top for investment income, producing a combined federal rate near 40.8%. A taxpayer in California or New York City pays an additional 10% or more, making effective rates above 50% routine in coastal metros.
Municipal bond interest is exempt from federal income tax, and in-state munis are typically exempt from state tax. At a 40.8% combined federal rate, a 3.5% tax-free yield becomes a 5.9% taxable equivalent, while a 4.5% muni yield equates to 7.6%, and a 4.4% yield works out near 7.4%. Treasuries cannot match those numbers today.
SECURE 2.0 left munis untouched, but the Tax Cuts and Jobs Act framework was extended and modified under the One, Big, Beautiful Bill, keeping the 37% top rate in place for 2026. The tax-arbitrage case for munis rests on that bracket staying intact.
MUB: The Default Investment-Grade Allocation
MUB is the category benchmark because it tracks a broad index of investment-grade national munis, holds a diversified portfolio, and has one of the lowest expense ratios among fixed-income ETFs. The fund spreads its weight across thousands of issuers, with top single positions such as University of Texas revenue bonds and Atlanta water and wastewater revenue paper at just 0.2% each. State exposures concentrate in Texas, New York, California, Ohio, New Jersey, and Washington, with the largest issuers in the market.
It is what a high earner buys for tax exemption without credit risk in unrated or speculative-grade issuers. The portfolio is dominated by state general obligation bonds and essential-service revenue bonds for water, transportation, and higher education. Default rates on these categories have been negligible historically.
MUB’s distribution rate runs around 3.5%, translating to a tax-equivalent yield near 5.9% for a 40.8% taxpayer. That beats the after-tax Treasury but is the lowest yield of the three funds. Monthly distributions over the trailing 12 months totaled $3.39 per share, modestly above the prior year’s $3.28. Shares are around $107, up 6% over the past year and roughly 1% year to date.
HYD: The Yield-Maximizer With Credit Risk
HYD holds below-investment-grade and unrated municipal bonds, concentrating in tobacco settlement paper, hospital and healthcare systems, industrial development revenue bonds, and Puerto Rico debt. Distribution yield runs near 4.32%, producing a tax-equivalent yield around 7.6% at the top combined federal rate.
That extra yield compensates for two risks. The first is that credit risk comes from tobacco bonds, which depend on continued cigarette consumption, and from Puerto Rico paper, which has undergone multiple restructurings. Duration risk means that a 100-basis-point move in muni rates produces a larger price swing than a 100-basis-point move in MUB. Shares trade near $51, with a one-year total return of about 7.2% and a five-year price return of essentially zero, a reminder that this fund earns returns through coupon, not capital appreciation.
Monthly distributions in 2026 have ranged from $0.17 to $0.21 per share, consistent with 2024 and 2025 levels but below the $0.22 to $0.24 range seen during the higher-rate environment of 2019 and 2020.
HYMB: The Overlooked Alternative to HYD
HYMB occupies the same high-yield muni territory as HYD but tracks the Bloomberg High Yield Municipal Bond Index. The two indices diverge in detail, with HYMB tending to limit or exclude some of the most distressed names that HYD holds, and its sector and state weights drift away from HYD’s in tobacco and Puerto Rico exposure.
The fund yields around 4.55%, roughly in the same neighborhood on a tax-equivalent basis. It carries a smaller asset base, making spreads marginally wider on heavy trading days, and has historically traded with slightly less price volatility than HYD during muni selloffs. Shares are near $25, up 2.3% year to date and 6% over the past year, which puts it in heavy competition with HYD.
An investor seeking high-yield muni exposure without betting entirely on a single index methodology can split between HYD and HYMB. The two funds produce similar yields with non-identical security overlap, dampening single-issuer concentration risk.
Choosing Between the Three
MUB is the default for the high earner wanting a tax-free income without credit complexity. The yield is lower, but the credit profile is institutional grade, and the expense ratio is the lowest in the category.
HYD is the choice for the investor who needs yield and is willing to accept that some holdings sit on shakier ground. The 7.6% tax-equivalent yield compensates for credit risk that occasionally manifests in performance, particularly during recessions and periods of credit stress.
HYMB earns its place as the diversifier. An allocation split between HYD and HYMB captures the high-yield muni premium without concentrating risk in a single-index methodology. With the Fed Funds rate at 3.75% and the 10-year Treasury near 4.43%, the after-tax math points to munis for any investor in the top bracket.
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