Top 3 High-Yield Muni Bond ETFs

High-yield municipal bond exchange-traded funds (ETFs) invest in the debt issued by states, counties, cities, special purpose districts, or local government agencies. These municipalities issue bonds to raise money for civic projects, such as building public schools, repairing bridges, or expanding airports. Generally, this type of ETF tracks the performance of an index that focuses on high-yield municipal bonds by using a sampling approach.

Although this sector of the muni universe offers high potential returns, it carries a moderate-to-high degree of credit risk. That makes it a good candidate for the ETF structure: Investors can mitigate some of that risk via the diversification of the fund's portfolio. Like the underlying debt instruments they hold, these ETFs are tax-exempt, which can be highly beneficial to investors in high-income tax brackets.

Here are three leading muni bond ETFs. All data is current as of January 2022.

1. SPDR Nuveen Bloomberg Barclays High Yield Municipal Bond ETF

This fund (NYSEARCA: HYMB) began life in 2011 as the SPDR Nuveen S&P High Yield Municipal Bond ETF. In October 2019, its sponsor State Street Global Advisors changed the benchmark, and hence the name, to SPDR Nuveen Bloomberg Barclays High Yield Municipal Bond ETF. The fund seeks to provide investment results corresponding to the performance of this index, which measures the performance of USD-denominated high-yield municipal bonds issued by U.S. states, the District of Columbia, U.S. territories, and local governments or agencies. It invests at least 80% (and usually virtually all) of its assets in securities in the index, or with identical characteristics to those in the index.

HYMB is heavily weighted toward below-investment-grade municipal bonds with 10 or more years to maturity. Its top holdings include bonds issued by entities in Puerto Rico, Ohio, and Chicago.

HYMB has a current yield of 4.07%, a taxable equivalent yield of 5.43% (based on the highest marginal tax bracket), and a modified adjusted duration of 6.5 years. HYMB charges an expense ratio of 0.35%.

Based on these statistics, the fund is best suited for fixed-income investors with investment horizons greater than 10 years who have high-risk tolerances seeking exposure to the high-yield municipal bond market while generating high potential federal tax-exempt yields.

2. VanEck Vectors High Yield Municipal Index ETF

Established in 2009 as the Market Vectors High Yield Municipal Index ETF (NYSEARCA: HYD)—the name changed in 2016—this fund seeks to replicate and provide investment results corresponding to the Bloomberg Municipal Custom High Yield Composite Index. HYD's benchmark index is designed to track the performance of U.S. dollar-denominated, long-term, high-yield, tax-exempt bonds.

The fund has total net assets of $369 billion, 1,831 holdings, and an expense ratio of 0.35%. HYD takes a more conservative approach than HYMB. Although HYD's primary focus is on high-yield municipal bonds, which generally have below-investment-grade credit ratings, it also allocates 24.81% of its portfolio to investment-grade debt. Currently, its top 10 holdings include issuers based in Illinois, Puerto Rico, Florida, Ohio, and California.

HYD has an average yield to maturity of 2.44% and a taxable equivalent 30-day SEC yield of 3.25% (at the highest tax bracket). It has an average coupon of 4.98% and a modified duration of 6.88 years. Due to its high duration, HYD carries a moderate-to-high degree of interest rate risk. If yields increase by 100 basis points, HYD's portfolio theoretically decreases by 6.65%. Therefore, HYD is best suited for fixed-income investors with high-risk tolerances and long-term investment horizons who seek exposure to a diversified portfolio of high-yield municipal bonds that generate monthly income.

3. VanEck Vectors Short High Yield Municipal Index ETF

The VanEck Vectors Short High Yield Municipal Index ETF (NYSEARCA: SHYD) seeks to provide investment results, with a high degree of correlation, corresponding to the Bloomberg Municipal High Yield Short Duration Index. The index tracks the overall performance of high-yield, short-term, tax-exempt U.S. dollar-denominated municipal bonds. The newest of the trio, SHYD was issued on Jan. 13, 2014. It has 707 holdings, and net assets of $457 million.

SHYD focuses on high-yield municipal bonds like its sister fund HYD, but with shorter durations—maturities of one to 12 years. Bonds of shorter duration have less sensitivity to interest rates, and this suggests SHYD could offer a lower degree of interest rate risk than our other two funds. The average number of years to maturity is 8.11.

Since SHYD focuses on short-term municipal bonds, it has a lower effective duration as well—4.34 years. That indicates it theoretically loses 4.34% if interest rates rise by 1%. Its 30-day SEC yield is 1.64%, and its taxable equivalent yield (highest tax bracket) is 2.2%.

All in all, SHYD is best suited for investors seeking exposure to the short-term, high-yield municipal bond market while generating high potential yields with a low degree of interest-rate sensitivity.