Which US Municipal Bond Fund Delivers Better Tax-Free Returns? HICOX, VMLTX or AITFX

Tax-free income sounds appealing, but finding the right municipal bond fund isn’t straightforward. Three standout options in the US market—Colorado Bondshares, Vanguard Limited Term Tax-exempt Fund, and Invesco Limited Term Municipal Income Fund—each take different approaches to generating tax-exempt returns.

Why Municipal Bond Funds Matter for Conservative Investors

Municipal bonds (muni bonds) are debt securities issued by US states, cities, and counties to fund infrastructure projects. The biggest draw? Interest payments are typically exempt from federal taxes, making them ideal for high-income earners seeking stable, tax-sheltered income. Unlike equity-focused funds, municipal bond funds prioritize capital preservation while delivering regular dividends, offering a middle ground between growth and safety.

The Three Top Contenders: A Closer Look

Colorado Bondshares (HICOX) leads in returns. With five-year annualized returns of 4.4%, this fund focuses exclusively on tax-exempt Colorado municipal securities. As of December 2024, it allocated 30.8% of assets to miscellaneous bonds, reflecting a diversified approach within the state’s municipal landscape. The fund uses leverage alongside borrowings to maximize returns on eligible investments.

Vanguard Limited Term Tax-exempt Fund (VMLTX) prioritizes safety and liquidity. Maintaining a 2-6 year average maturity, this fund invests predominantly in top-rated municipal bonds with the option to hold lower-rated securities selectively. Its five-year annualized return of 2.6% reflects its conservative positioning, while the 0.17% expense ratio keeps costs minimal—a key advantage for long-term investors.

Invesco Limited Term Municipal Income Fund (AITFX) targets income-focused US investors. With an effective portfolio maturity of five years or less, it concentrates on investment-grade municipal debt that offers federal tax-exempt interest. The fund’s five-year annualized return stands at 2.4%. Since April 2016, Jack Connelly has managed the fund, bringing consistent oversight to its strategy.

Picking Your Winner

The choice depends on your priorities. HICOX suits aggressive investors prioritizing maximum returns and concentrated Colorado exposure. VMLTX appeals to those valuing stability and rock-bottom fees. AITFX serves investors seeking a balanced, income-first approach with moderate maturity risk.

Each fund earned top-tier rankings for outperformance potential, making any a solid entry point for US investors seeking tax-efficient municipal bond exposure.