A 4.72% Tax-Free Muni ETF Yield Equals 7.49% Taxable Yield for Investors in the 37% Bracket
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Bond taxation is fairly straightforward. Interest from corporate bonds is generally taxed as ordinary income at the federal level and can also be subject to state income taxes. Treasury interest is still federally taxable, although it generally gets an exemption from state and local income taxes. Municipal bonds are the category I think income investors tend to underrate.
Interest from qualifying municipal bonds is generally exempt from federal income tax. Depending on the bond and where you live, it can potentially receive state and local tax exemptions as well. That means comparing a municipal bond’s headline yield directly with a corporate bond yield can substantially understate what the muni is worth to a high-income investor.
This becomes especially important in retirement, when bonds may account for a larger portion of the portfolio and investors may actually be spending the distributions. A 4.72% federally tax-exempt yield, for example, can be worth considerably more once you account for what the IRS would otherwise take.
How Municipal Bonds Work
Municipal bonds are generally issued by states, cities, counties, and other government or government-related entities to finance public spending and infrastructure. There are two broad categories. General obligation bonds are generally backed by the taxing authority of the issuing government. Revenue bonds are supported primarily by revenue generated from a particular project, facility, or dedicated source, such as a toll road, airport, hospital, water system, or public transportation network.
Credit quality can vary considerably. Most broad municipal bond portfolios focus on investment-grade securities rated BBB-/Baa3 or higher. At that end of the market, you’re generally dealing with issuers considered to have strong capacity to meet their financial obligations. But just as with corporate bonds, you can venture below investment grade in exchange for higher yields.
High-yield municipal bonds compensate investors for accepting greater credit risk. Issuers may have weaker finances, less predictable revenue, greater leverage, or projects whose ability to service their debt is less certain. Defaults remain possible, and lower-rated bonds can become considerably more volatile when economic or credit conditions deteriorate.
HYD Offers a 4.72% Tax-Free Yield
For an investor willing to accept that additional risk, however, combining high-yield municipal credit with the federal tax exemption can produce an unusually attractive after-tax yield. The VanEck High Yield Muni ETF (HYD) provides diversified exposure to this riskier portion of the municipal bond market.
HYD tracks the ICE Broad High Yield Crossover Municipal Bond Index and charges a 0.32% expense ratio. Importantly, the portfolio isn’t exclusively composed of the lowest-quality municipal issuers. The index includes approximately 25% BBB-rated bonds and 5% A-rated bonds, providing some investment-grade exposure alongside its high-yield holdings. It also caps non-rated bonds at 30% of the portfolio, a feature intended to support liquidity while preventing unrated debt from dominating the strategy.
HYD currently has a 4.72% 30-day SEC yield. Because qualifying municipal interest is generally exempt from federal income tax, however, that’s not the number I’d use when comparing it with a taxable bond ETF. Instead, I’d look at the tax-equivalent yield.
Tax-equivalent yield estimates how much a taxable bond investment would need to yield for an investor to retain the same amount of income after federal taxes. The higher your marginal tax bracket, the more valuable HYD’s federal tax exemption becomes.
Based on VanEck’s estimates as of Sept. 22, 2026, HYD’s 4.72% 30-day SEC yield translates into the following taxable-equivalent yields:
| Federal tax rate | Tax-equivalent 30-day SEC yield |
|---|---|
| 12% | 5.36% |
| 22% | 6.05% |
| 24% | 6.21% |
| 32% | 6.94% |
| 35% | 7.26% |
| 37% | 7.49% |
For a retiree in the highest 37% federal bracket, a taxable bond investment would therefore need to yield approximately 7.49% to provide the same after-federal-tax income as HYD’s 4.72% tax-exempt yield. That’s the number that makes HYD interesting to me.
Still, the tax advantage doesn’t eliminate the underlying investment risk. HYD owns below-investment-grade municipal debt, so credit deterioration and defaults can hurt returns. Its market price can also decline when interest rates rise or investors demand wider credit spreads.
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Mike Barrington is a father, entrepreneur, businessman, visionary, and self-proclaimed technology guru. A thought leader in multiple industries, Mike has spent decades turning complex problems into even more complex solutions, often while wearing a Bluetooth headset and discussing market disruption.
When he's not revolutionizing business, mentoring future leaders, or leveraging synergies, Mike enjoys spending time with his family, staying ahead of emerging technologies, and reminding people that success isn't measured by money, but by the number of people who refer to you as a legend.
His personal motto: "Work smarter, not harder. Unless someone's watching."
