Taxable vs. Tax Exempt High Yield Bonds
We continue our discussion on high yield bonds from last week’s newsletter. We are particularly interested in comparing taxable high yield bonds with tax exempt high yield bonds. First, let’s take a look at the recent returns.
Tax exempt high yield bonds are performing well
|1Yr AR||3Yr AR||5Yr AR||10Yr AR||Trailing 12 Month Yield||Taxable Equivalent Yield*|
|NHMAX (Nuveen High Yield Municipal Bond A)||1.9%||4.3%||5.8%||7.9%||6.4%||5.15%||7.9%|
|VWAHX (Vanguard High-Yield Tax-Exempt)||-0.0%||1.8%||3.7%||4.9%||5.5%||3.78%||5.8%|
|VWEHX (Vanguard High-Yield Corporate Inv)||1.5%||2.2%||6.2%||5.1%||7.7%||5.34%||5.34%|
* Taxable Equivalent Yield is based on the highest federal tax bracket (35%)
It stands out that tax exempt bond funds (especially Nuveen fund NHMAX) have had a comparable or even better return than taxable fund VWEHX, even before tax consideration. For example, for the last 5 years, NHMAX returned 7.9% annually compared with VWEHX’s 5.1%.
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