Greater risk is paying off for these tax-free bonds. Here’s how they may fit into your portfolio

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Greater risk is paying off for these tax-free bonds. Here’s how they may fit into your portfolio
AB High Income Municipal Portfolio Advisor ClassVanguard High-Yield Tax-Exempt FundBusiness News
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High-yield municipal bonds had a strong first half, according to Bank of America.

When it comes to tax-free municipal bonds, investors who are comfortable with taking more risk are seeing attractive returns. High-yield municipal bonds – issues that are rated below BBB by Standard & Poor's – have greater default risk than their investment-grade counterparts. The riskier bonds outperformed in the first half of the year, posting total returns of 4.72%, according to Bank of America. Investment-grade munis saw a return of -0.07% in that period.

"We're being very selective in senior living and using research to make sure we have issuers that we're very comfortable with," he said. Norton is a manager on the AB High Income Municipal Portfolio , which has a 30-day SEC yield of 4.18% and an expense ratio of 0.9%. The team sees affordable housing as a high-yield area that would hold up even in a recession, as well as charter schools – "a sector that could be resilient in an economic slowdown," Norton said.

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