Quick reading
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iShares National Muni Bond ETF (MUB) yields 3.5% tax-free with investment-grade credit quality and lower expenses, while VanEck High Yield Muni ETF (HYD) yields 4.32% through below-investment grade tobacco and Puerto Rico bonds offering tax-equivalent yields of 7.6%, and SPDR Nuveen Bloomberg High Yield Muni ETF (HYMB) yields 4.55% with a similar exposure but lower concentration risk.
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Higher earners facing combined federal tax rates of 40.8% on Treasury yields find municipal bonds offering tax-equivalent yields of 5.9% to 7.6% much more attractive than Treasury bonds’ 2.6% after-tax yields.
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The 10-year Treasury yields 4.43%, which sounds competitive until a high-income person puts it through the tax check. At the top federal marginal rate of 37% plus the net investment income tax of 3.8%, the after-tax yield plummets to about 2.6%. If you add the state income tax in California, New York or New Jersey, the actual result falls even further. Three municipal bond ETFs are absorbing flows that used to go into Treasuries: the iShares National Muni Bond ETF (NYSEARCA:MUB), the VanEck High Yield Muni ETF (NYSEARCA:HYD), and the SPDR Nuveen Bloomberg High Yield Municipal Bond ETF (NYSEARCA: HYMB).
Each fund offers tax-equivalent returns of over 4% for top-tier investors, with the two high-yield options yielding over 4% tax-free. The question is which fund matches the investor’s tolerance for credit and duration risk.
Why tax math is more important than overall performance
For tax year 2026, the top federal level is 37%, which is over $640,600 for single taxpayers and $768,700 for married couples filing jointly. The 3.8% NIIT is added to investment income, yielding a combined federal rate close to 40.8%. A taxpayer in California or New York City pays an additional 10% or more, making effective rates above 50% common in coastal metropolitan areas.
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Interest on municipal bonds is exempt from federal income tax, and state municipalities are generally exempt from state tax. At a combined federal rate of 40.8%, a tax-free yield of 3.5% becomes a taxable equivalent of 5.9%, while a municipal yield of 4.5% equals 7.6% and a yield of 4.4% equals about 7.4%. Treasuries can’t match those numbers today.
SECURE 2.0 left munis intact, but the Tax Cuts and Jobs Act framework was expanded and modified under the One, Big, Beautiful Bill, keeping the top 37% rate in place through 2026. The tax arbitrage case for munis rests on that bracket remaining intact.
MUB: The default investment grade allocation
MUB is the category benchmark because it tracks a broad index of investment-grade national municipalities, has a diversified portfolio, and has one of the lowest expense ratios among fixed income ETFs. The fund spreads its weight across thousands of issuers, with notable individual holdings, such as University of Texas revenue bonds and Atlanta Water and Wastewater revenue securities, at just 0.2% each. State exposures are concentrated in Texas, New York, California, Ohio, New Jersey and Washington, with the largest emitters in the market.
It is what a person with high income buys to obtain tax exemption and without credit risk in unrated or speculative grade issuers. The portfolio is dominated by state general obligation bonds and essential services revenue bonds for water, transportation and higher education. Default rates in these categories have historically been negligible.
The MUB distribution rate is around 3.5%, which translates into a tax yield equivalent to close to 5.9% for a 40.8% taxpayer. That beats Treasury after taxes, but it’s the lowest return of the three funds. Monthly distributions over the trailing 12 months totaled $3.39 per share, modestly up from $3.28 a year ago. Shares are about $107, up 6% from last year and up about 1% so far this year.
HYD: The yield maximizer with credit risk
HYD holds unrated and below-investment grade municipal bonds, focusing on tobacco settlement documents, hospital and health systems, industrial development revenue bonds, and Puerto Rico debt. The distribution yield is close to 4.32%, producing a tax-equivalent yield of about 7.6% at the highest combined federal rate.
That extra performance offsets two risks. The first is that credit risk comes from tobacco bonds, which depend on continued cigarette smoking, and Puerto Rico paper, which has gone through multiple restructurings. Duration risk means that a 100 basis point move in municipal rates produces a larger price change than a 100 basis point move in MUB. Shares trade near $51, with a one-year total return of about 7.2% and a five-year price return of virtually zero, a reminder that this fund earns returns through coupons, not capital appreciation.
Monthly distributions in 2026 ranged between $0.17 and $0.21 per share, consistent with 2024 and 2025 levels, but below the $0.22 to $0.24 range seen during the higher rate environment of 2019 and 2020.
HYMB: The Overlooked Alternative to HYD
HYMB occupies the same high-yield municipal territory as HYD, but tracks the Bloomberg High-Yield Municipal Bond Index. The two indices diverge in details: HYMB tends to limit or exclude some of the more problematic names that HYD owns, and its sector and state weightings diverge from HYD’s in tobacco and Puerto Rico exposure.
The fund yields around 4.55%, roughly in the same zone in tax-equivalent terms. It has a smaller asset base, making spreads slightly wider on busier trading days, and has historically traded with slightly lower price volatility than HYD during municipal sell-offs. Shares are near $25, up 2.3% year to date and 6% over the past year, putting it in strong competition with HYD.
An investor seeking high-yield municipal exposure without betting exclusively on a single index methodology can split between HYD and HYMB. The two funds produce similar returns with a non-identical overlap of values, reducing the risk of concentration of a single issuer.
Choose between the three
MUB is the default for high-income earners who want tax-free income without credit complexity. The yield is lower, but the credit profile is institutional grade and the expense ratio is the lowest in the category.
HYD is the choice for the investor who needs performance and is willing to accept that some holdings are on shakier ground. The 7.6% tax equivalent yield offsets the credit risk that occasionally manifests itself in performance, particularly during recessions and periods of credit stress.
HYMB earns its place as a diversifier. A split allocation between HYD and HYMB captures the high-yield municipal premium without concentrating risk in a single index methodology. With the fed funds rate at 3.75% and the 10-year Treasury bond near 4.43%, the after-tax math points to munis for any investor in the top bracket.
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