In 2015, municipal bonds continued to perform well, even in the face of rising interest rates . The Barclays Municipal TR USD Index gained 3.30%, following a 9.05% gain in 2014. They were showing no signs of slowing down as of March 21, 2016, with a year-to-date gain of 1.35%. The really good news for tax-exempt bond investors is that yields on long-term municipal bonds are higher than the yield on a Treasury 30-year note. As of March 21, 2016, the average yield on 30-year general obligation municipal bonds was 2.82%, compared to a 2.68% yield on Treasury 30-year notes. That is the equivalent of a 4.43% taxable yield, which can’t be found with the same relative level of safety. The good news going forward in 2016 is that any potential rate hikes are not likely to have a significant, negative effect on municipal bond prices as they tend to be less sensitive to increasing interest rates.

For investors seeking high after-tax income, this may be as good a time as any to invest in municipal bonds. Investors should look for investment-grade bonds and bonds with intermediate-term maturities, as they present less interest rate and credit risk. The best way for most investors to invest in municipal bonds is through exchange-traded funds (ETFs) that target bonds with those characteristics. As of March 2016, the largest municipal bond ETF, the iShares National AMT-Free Muni Bond ETF (NYSEARCA: MUB), was up 0.79%, which was below the category average of 1.43%.

The Best Performing Municipal Bond ETFs YTD in 2016

Market Vectors® CEF Municipal Income ETF

As of March 29, 2016, the Market Vectors CEF Municipal Income ETF (NYSEARCA: XMPT) was up 4.27% YTD. Its trailing 12-month yield was 5.09%. The fund had $80.30 million in assets under management (AUM) and an average daily trading volume (ADTV) of 24,612. The fund’s objective is to replicate the performance and yield of the S-Network Municipal Bond Closed-End Fund Index, which is composed of shares of U.S.-listed closed-end funds. Among its top holdings are funds such as BlackRock Municipal 2030 Target Term, and several different municipal bond funds managed by Nuveen Investments Inc. The four-year-old fund has returned 5.19% over the last three years, and its expense ratio is 1.43%.

Deutsche X-trackers Municipal Infrastructure Revenue Bond ETF

The Deutsche X-trackers Municipal Infrastructure Revenue Bond ETF (NYSEARCA: RVNU) was up 2.49% year-to-date (YTD) as of March 2016, with a trailing 12-month yield of 2.99%. The fund seeks to achieve investment results similar to the Solactive Municipal Infrastructure Revenue Bond Index. As of March 29, 2016, the fund had $26.6 million in AUM invested primarily in revenue bonds, with the highest weighting in transportation, followed by smaller weightings in utilities and the water and sewer sector. The fund is less than three years old. As of March 2016, it had a one-year return of 4.49% and an expense ratio of 0.30%.

The Worst Performing Municipal Bond ETFS YTD in 2016

SPDR® Nuveen Barclays ST Muni Bond ETF

The SPDR Nuveen Barclays ST Muni Bond ETF (NYSEARCA: SHM) had returned 0.37% YTD as of March 29, 2016. The fund’s objective is to track the price and yield of the Barclays Managed Money Short Term Index by investing its $2.89 billion in AUM in bonds with one- to five-year maturities. The portfolio is allocated 48.48% to state and local general obligation (GO) bonds, 20.22% to education bonds, and the balance is split between transportation, the water and sewer sector and utilities. The fund’s five-year return is 1.60% and its expense ratio is 0.20%.

PowerShares VRDO Tax-Free Weekly ETF

As of March 29, 2016, the PowerShares VRDO Tax-Free Weekly ETF (NYSEARCA: PVI) is down 0.04% YTD. The fund seeks to replicate the performance of the Bloomberg US Municipal AMT-Free Weekly VRDO Index, which consists of variable rate demand obligation (VRDO) bonds. VRDOs are long-term municipal bonds with floating interest rates that are reset periodically, typically weekly. The fund had $69.74% of its AUM allocated among state and local GO, health, transportation, housing and education bonds. Over the last five years, the fund has returned 0.04% and its expense ratio is 0.25%.

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