How to Build Wealth with Top-Ranked High Yield Municipal Bond Funds

For investors seeking a balance between income generation and capital preservation, high yield municipal bond funds offer a compelling opportunity. These funds focus on debt securities issued by governmental entities to finance public infrastructure, and they distinguish themselves through attractive tax advantages and steady income potential. Whether you’re in a higher tax bracket or simply looking for reliable returns, understanding how to select the right high yield municipal bond funds can significantly enhance your investment strategy.

Understanding Municipal Bonds and Tax Benefits

Municipal bonds, commonly known as muni bonds, represent debt obligations issued by states, cities, counties, and other governmental agencies. These entities use the capital raised through bond offerings to fund essential projects ranging from road construction to school development. What makes these securities particularly appealing is their tax structure: interest income generated from municipal bonds is typically exempt from federal taxation, and sometimes from state and local taxes as well.

This tax-exemption feature creates substantial value for investors in higher income tax brackets. Unlike corporate bonds where interest is fully taxable, the after-tax returns on municipal securities can be significantly more attractive. As a result, many investors view muni bonds not merely as an investment vehicle, but as a strategic tax-planning tool alongside their wealth-building objectives.

Why High Yield Municipal Bond Funds Matter for Income Investors

For those seeking regular income with reduced tax burden, high yield municipal bond funds present an ideal solution. Rather than purchasing individual municipal bonds, fund investors gain exposure to diversified portfolios of municipal securities, which reduces concentration risk while maintaining the tax-free income benefit.

These funds typically distribute income semi-annually or more frequently, providing steady cash flow to shareholders. Beyond income generation, funds from this category generally offer greater stability compared to equity-focused or alternative investment vehicles. The combination of regular distributions and capital preservation appeals to conservative investors who want their portfolio working for them without exposure to stock market volatility.

Three Leading High Yield Options: Performance Comparison

Three standout high yield municipal bond funds have earned top rankings for their consistent performance and strategic positioning. Each has achieved Zacks Mutual Fund Rank #1 designation, indicating strong buy status and expected outperformance versus peer funds.

Colorado Bond Shares A Tax Exempt Fund (HICOX) focuses its investment portfolio on tax-exempt bonds and municipal securities within Colorado. The fund exclusively holds tax-exempted securities, providing investors with concentrated exposure to the state’s municipal market. As of mid-2024, the fund maintained approximately 32.3% of its net assets in miscellaneous bonds, reflecting a balanced approach to credit quality. HICOX’s five-year performance delivered 3.6% annualized returns, showcasing solid historical performance.

Delaware National High Yield Municipal Bond Fund (CXHYX) specifically targets higher income potential through allocation to lower-rated municipal securities. This high yield municipal bond funds strategy accepts additional credit risk in exchange for enhanced income generation. The fund invests across medium- and lower-grade municipal securities that remain exempt from federal income taxation. CXHYX reported five-year annualized returns of 2.5% alongside a competitive 0.85% expense ratio, making it an efficient choice for income-focused investors willing to accept greater credit exposure.

Invesco Limited Term Municipal Income Fund (AITFX) pursues a more conservative posture by emphasizing investment-grade municipal securities with federal tax-exempted status. Fund advisors maintain a dollar-weighted average effective maturity of five years or less, positioning the portfolio for interest rate flexibility. Under manager Jack Connelly’s leadership since April 2016, AITFX has delivered five-year annualized returns of 1.7%, reflecting its focus on capital stability over aggressive yield-seeking.

Evaluating Risk and Returns in Each Fund

Understanding the risk-return profile of each high yield municipal bond fund option is crucial for aligned decision-making. HICOX offers moderate returns with concentrated geographic exposure, suitable for investors with Colorado-specific interests or regional preference. CXHYX embraces higher-yielding municipal securities, acknowledging that greater credit risk accompanies enhanced income potential—this approach suits investors with higher risk tolerance seeking maximum current income. AITFX prioritizes principal preservation through investment-grade holdings and limited maturity exposure, appealing to conservative investors who view stability as paramount.

The expense ratios and historical performance data reveal each fund’s value proposition. CXHYX’s 0.85% expense ratio represents competitive fund management costs, while the varying five-year returns (3.6%, 2.5%, and 1.7% respectively) reflect each fund’s distinct positioning within the municipal bond spectrum.

Making Your Selection Decision

Your choice among these top-ranked high yield municipal bond funds should align with your specific financial objectives, risk tolerance, and income requirements. Investors prioritizing income generation with moderate risk might gravitate toward CXHYX, whose yield-enhanced strategy targets higher distributions. Those seeking balanced returns with geographic specificity might prefer HICOX’s Colorado-focused approach. Conservative investors emphasizing capital preservation would likely find AITFX’s limited-term, investment-grade strategy most appealing.

Regardless of your selection, all three funds share the fundamental advantage of federal tax-exemption, making them particularly valuable for those in elevated tax brackets. By selecting from top-ranked high yield municipal bond funds with proven track records and strong Zacks designations, investors position themselves to achieve steady tax-free income while protecting the capital they’ve worked hard to accumulate.