The Federal Reserve showed just how important the bond market is by purchasing debt-focused exchange-traded funds (ETFs), but one area they didn’t focus on was the municipal bond market. It’s one sub-sector of the debt market that retail investors shouldn’t overlook and let’s dive into some reasons why.

“Municipal bonds have historically low default rates, which means that if you choose to invest in them, you’re likely to get all of your interest payments on schedule, especially if you choose bonds with a high credit rating,” a Motley Fool article explained. “But here’s where municipal bonds have a major advantage over corporate bonds: You’ll get a huge tax break for putting them in your portfolio.”

“The interest you earn from corporate bonds is subject to taxes — there’s no getting around it,” the article went on to add. “On the other hand, municipal bond interest is always exempt from taxes at the federal level. Furthermore, if you buy municipal bonds that are issued by the state you reside in, you’ll avoid state and local taxes on that interest as well. That’s a good thing if taxes are a concern for you, whether because you’re already in a high bracket or you’re worried about paying them during retirement.”

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^BBMBTR data by YCharts

As opposed to purchasing the actual municipal debt issues, investors can opt to go with ETFs. ETF investors looking for muni exposure can look to these funds:

  1. iShares National Muni Bond ETF (NYSEArca: MUB): seeks to track the investment results of the S&P National AMT-Free Municipal Bond IndexTM. The fund generally will invest at least 90% of its assets in the component securities of the underlying index and may invest up to 10% of its assets in certain futures, options and swap contracts, cash and cash equivalents. The index measures the performance of the investment-grade segment of the U.S. municipal bond market.
  2. SPDR Nuveen Bloomberg Barclays Short Term Municipal Bond ETF (NYSEArca: SHM): seeks to provide investment results that correspond generally to the price and yield performance of the Bloomberg Barclays Managed Money Municipal Short Term Index. The fund invests most of its total assets in the securities comprising the index and in securities that the Sub-Adviser determines have economic characteristics that are substantially identical to the economic characteristics of the securities that comprise the index. The index tracks the short-term tax exempt municipal bond market and provides income that is exempt from federal income taxes.

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