American Funds offers several highly rated mutual funds for investors seeking tax-exempt bond income, and they fall in different risk categories to match several varying objectives. The American Funds Limited-Term Tax-Exempt Bond class A (“LTEBX”), the American Funds Tax-Exempt California class A (“TAFTX”) and the American High-Income Municipal Bond class F-1 (“ABHFX”) are all attractive options based on historical risk-adjusted returns relative to the category and expense structure. All three funds get exceptional ratings from Morningstar.
Limited Term Tax-Exempt Bond (LTEBX)
The Limited Term Tax-Exempt Bond Fund holds at least 80% of its assets in securities that are exempt from federal income tax and from the alternate minimum tax. The fund's portfolio is concentrated in securities with investment-grade ratings, with a dollar-weighted effective maturity no longer than three years. The fund's portfolio is divided among multiple advisers, each of whom controls only his or her segment. A $250 minimum investment is also accommodating for most investors.
As of May 2016, the fund's trailing-three-year average return was 1.52%, 76 basis points above the municipal national short-term category benchmark. The fund's five-year average return of 3.08% was 148 basis points above the benchmark, and the 10-year average return of 3.54% exceeded the category average by 112 basis points. The fund has achieved these superior results while exposing investors to slightly above-average risk. The fund's 0.74 three-year Sharpe ratio topped the 0.64 ratio of the benchmark, and the five-year value of 1.43 topped 1.26 from the category average. The 10-year Sharpe ratio was almost identical. The fund gets a five-star rating from Morningstar.
Tax-Exempt California Bond (TAFTX)
The Tax-Exempt California Bond Fund holds securities issued by the state of California as well as agencies and municipalities located in that state. At least 80% of holdings are invested in securities that are exempt from federal and California state income tax. The holdings are primarily in securities with ratings of at least BBB- or Baa3, though the portfolio may include some junk bonds. The fund has a $1,000 minimum investment and a maximum sales load on purchases of 3.75%. In some circumstances, investors qualify for load-waived shares of the fund.
The fund's trailing-three-year average return was 3.88%, as of May 2016, 82 basis points above the municipal California intermediate bond category benchmark. The fund's 6.7% five-year average return outpaced the benchmark by 159 basis points, and the 4.92% 10-year return was 74 basis points above the benchmark. The fund's three-year alpha relative to Barclays Municipal Total Returns index was 0.26, while the category benchmark's was -0.45. The fund's five-year alpha was 0.92, relative to the category's -0.41, and the 10-year alpha was -0.71, slightly above the category benchmark -0.78. The load-waived class has a five-star rating from Morningstar. For investors unable to buy load-waived shares, regular class A shares are also a strong option with a four-star rating.
High-Income Municipal Bond (ABHFX)
The High-Income Municipal Bond employs a relatively high-risk strategy in pursuit of superior current income. The fund invests 80% of its assets in securities that are exempt from federal income taxation. At least half of the portfolio is invested in bonds rated at or below BBB+ or Baa1. The fund uses multiple managers, each of whom is in charge of a dedicated portion of the portfolio. Class F shares have a minimum investment of $250, with 12-1b fees and no load.
As of May 2016, the fund's 4.83% three-year average return beat the high-yield municipal bond category average by 72 basis points. The 7.98% five-year average return surpassed the benchmark by 49 basis points, and the 4.89% 10-year return was 77 basis points better than the benchmark. The fund's three-year alpha was 0.45 relative to the Barclays Municipal Total Return index, and the benchmark's alpha was -0.91. The fund's 1.64 five-year alpha beat the category's 0.34, and the -0.58 10-year alpha beat the benchmark's -2.01. The class F shares of the fund get a four-star rating from Morningstar.