3 Tax-Free Funds That Are Gems

Russel Kinnel: Municipal bonds produce tax-free income and generally are pretty stable. Muni-bond funds are well diversified, so the rare default isn’t likely to harm those well-run muni funds. However, a lot of muni issuance is long maturity, so there is significant interest-rate risk. Check a fund’s 2022 losses, and you’ll get a practical idea of the real downside of these funds. Today, I’ve picked three muni funds with different levels of interest-rate risk to give you some idea. We’ll go from lowest to highest.

3 Tax-Free Funds That Are Gems

1. T. Rowe Price Tax-Free Short-Intermediate PRFSX
2. Vanguard Intermediate-Term Tax-Exempt VWITX
3. Fidelity Tax-Free Bond FTABX

T. Rowe Price Tax-Free Short-Intermediate has only modest levels of interest-rate risk. Charlie Hill builds a well-diversified portfolio to produce a decent yield. T. Rowe has built a strong team on the muni side, and this fund slots in nicely at the lower-risk end of the spectrum.

Vanguard Intermediate-Term Tax-Exempt is just the sort of straightforward bond fund you’d expect from Vanguard. It’s super cheap, well run, and avoids doing anything risky just to pump up yield. The Silver-rated fund owns a diffuse, high-quality portfolio that performs consistently well.

Gold-rated Fidelity Tax-Free Bond is one of the best funds in the muni long category. It absolutely has interest-rate risk, but its trio of managers are very good at selecting good issues for a solid risk/reward profile. Fidelity’s MO is really to avoid making big macro bets and instead focus on issue selection. It’s an approach that has worked well, and I own this fund.

Watch 3 Incredibly Dull Funds That You Should Buy for more from Russel Kinnel.