The Fed Rate Hike Just Made These 4 Muni Funds a Smarter Buy Than MUB
The Fed just handed muni bond investors a rare pricing window, but the funds worth buying are not the ones most investors already own. Four leveraged closed-end funds sold off hard in September, and the tax-free yields now on offer…
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If you own the iShares National Muni Bond ETF (NYSEARCA:MUB) for tax-free income, the past month was painful. MUB is the passive muni default: thousands of investment-grade bonds, monthly distributions, and an expense ratio of just 0.05%. What MUB does not do is pay 8%. After the Federal Reserve raised its target range upper bound to 4.00% on September 17, 2026, and the 10-year Treasury pushed to 4.96%, four leveraged national muni closed-end funds sold off in unison. Their tax-free distribution yields now sit near or above 8%, and each trades at a discount to NAV that is worth pricing carefully.
Why MUB Investors Should Even Look
MUB remains a legitimate core holding. Its 0.05% expense ratio is a permanent tailwind, and its unleveraged structure spares investors the drawdowns that hit borrowed portfolios when rates back up. For a reader seeking monthly income in a taxable account, though, MUB’s yield trails the leveraged CEF alternatives materially. The alternative set here is three Nuveen national muni closed-end funds plus one BlackRock peer, all monthly payers, all now trading below NAV after the September repricing.
How Much Went on Sale
All four funds gave up ground through the same rate window. In the past month, Nuveen Municipal Credit Income Fund (NYSE:NZF) fell 7.3%, Nuveen AMT-Free Municipal Credit Income Fund (NYSE:NVG) fell 7.26%, Nuveen AMT-Free Quality Municipal Income Fund (NYSE:NEA) fell 8.79%, and BlackRock MuniYield Quality Fund III (NYSE:MYI) fell 7.99%.
Here is the September 22 CEFConnect snapshot, with the current market-price distribution yield in the last column.
| Fund | Price | NAV | Discount | Monthly $ | Yield on Price |
|---|---|---|---|---|---|
| NZF | $11.40 | $11.60 | -1.72% | $0.0795 | 8.49% |
| NVG | $11.44 | $11.48 | -0.35% | $0.0790 | 8.47% |
| NEA | $10.22 | $10.57 | -3.31% | $0.0680 | 8.07% |
| MYI | $10.00 | $10.96 | -8.76% | $0.0555 | 6.80% |
Why NZF Is the Cleanest Swap
NZF pays the highest cash yield on today’s price. Its $0.0795 monthly distribution generates an 8.49% market-price rate and an 8.22% rate on NAV per CEFConnect, the top of the group on both measures. Effective leverage sits at 41.93%, giving roughly $1.42 of muni exposure per $1 invested. For a reader in the 32% federal bracket, an 8.49% tax-exempt yield equates to a taxable-equivalent yield of roughly 12.5%.
Trailing performance backs the choice. NZF’s 12-month total return on NAV is 7.75%, ahead of NVG’s 7.12%, NEA’s 6.14%, and MYI’s 6.53%. The fund is also earning its payout. Average earnings per share of $0.3136 against an annualized $0.954 distribution implies coverage well above one, so the income is not being propped up by return of capital.
When NVG or MYI Fits Better
NVG is the AMT-safe twin. Investors exposed to the alternative minimum tax pick up almost all of NZF’s yield at 8.47% without holding AMT-subject bonds. MYI is the deep-discount play at -8.76%, wider than its six-month average of -7.60%. The catch is that MYI’s distribution rate on NAV is just 6.08%, so you collect less per dollar of assets. NEA cut its monthly payout from $0.073 to $0.068 in September 2025, a reminder that these payouts move.
What You Are Actually Trading For
Yield of this size carries costs. All four funds run roughly 41% to 43% effective leverage, and their all-in expense ratios — including interest on that leverage — sit above 3% per CEFConnect (3.61% for NZF, 3.64% for NVG, 3.53% for NEA, 3.23% for MYI). MUB’s 0.05% expense ratio looks negligible until you remember it delivers roughly a third of the yield without borrowing. In 2022, when short rates spiked, this peer group posted NAV losses in the high teens and market-price losses above 20%. Another sustained tightening cycle would hurt again.
Practical Ways to Move
The swap does not need to be all-or-nothing. Rotating a portion of a MUB position — say, a quarter to a third — into NZF (or NVG for AMT-sensitive holders) captures the income pickup without doubling the account’s rate sensitivity. Check your MUB cost basis first. After the recent selloff, many holders are near breakeven, which limits capital-gains friction. This positioning is most tax-efficient in taxable accounts.
Where This Leaves You
MUB is still the right core for stability. If the reason you own muni bonds is monthly income, though, the recent selloff has repriced 8%-plus tax-free yields at NZF and NVG below where they traded a month ago. Track the discount weekly on CEFConnect and re-evaluate if it flips back to a premium or if a monthly distribution declaration comes in lower than expected. Until then, the yield differential remains the primary case for a partial rotation.
Contact [email protected] for any questions or corrections.
Ryne Mauck is an investment writer covering exchange-traded funds, retirement planning, and portfolio strategy. Through his work at 24/7 Wall St. and other investment platforms, including Seeking Alpha, he aims to provide clear, research-driven insights that help investors make more informed decisions while maintaining a long-term approach to investing.
Ryne holds a B.Sc. in Finance and an M.A. in Political Science. He is a formerly registered Municipal Advisor Representative and has passed the Series 50, Series 63, and Series 65 exams. His articles are not intended to be, nor should they be interpreted as, financial advice.
