With Tax Day just over a month away, now is an excellent time for investors to consider funds offering tax benefits. The good news for investors is that they don’t have to limit themselves in the fund universe when it comes to searching for tax breaks.
Some of the best funds for tax breaks can be found among exchange traded fund, index fund and even traditional active mutual funds. However, low turnover makes ETFs and passive index funds solid bets for investors on the prowl for tax efficiency.
“Index funds tend to have lower turnover, changing their holdings only when the index they follow changes (which is relatively infrequently for most indexes),” according to Morningstar. “Some funds are also explicitly managed for tax efficiency.”
Here are some of the best funds for investors looking to keep more of their cash rather than giving it to the tax man.
Vanguard Tax-Exempt Bond ETF (VTEB)
Expense ratio: 0.06% per year, or $6 on a $10,000 investment.
Municipal bonds are one of the most tax-advantaged asset classes out there and the Vanguard Tax-Exempt Bond ETF (NYSEARCA:VTEB) is one of the best funds in this category for cost-conscious investors are highlighted by that low annual fee of 0.06%.
“Income from municipal bonds, which are issued by state, city, and local governments, is generally free from federal taxes,” according to Vanguard. “Because they offer this special tax treatment, these bonds generally give you lower interest rates than comparable taxable bonds. So like tax-managed funds, they make the most sense for investors in higher tax brackets.”
VTEB, which tracks the S&P National AMT-Free Municipal Bond Index, holds 4,414 bonds with an average duration of 5.2 years, putting it in intermediate-term territory. Over 77% of those holdings carry credit ratings of AAA or AA, so credit risk is minimal with this Vanguard ETF. VTEB yields 2.22%, or more than double the yield on 10-year Treasuries.
VanEck Vectors Municipal Allocation ETF (MAAX)
Expense ratio: 0.38% per year
Keeping with the theme of municipal bond offerings being among the best funds for tax-sensitive investors, there is the VanEck Vectors Municipal Allocation ETF (CBOE:MAAX). MAAX is an intriguing muni strategy because it holds four other VanEck funds, meaning it provides exposure to over 5,000 municipal bonds of varying credit quality, maturities and yield.
While MAAX has the flexibility to move in and out of various VanEck municipal bond offerings, turnover is relatively low as the fund’s primary objective is to long-term total return. MAAX currently addresses longer and shorter duration high-yield munis as well as investment-grade fare in the long- and medium-term duration categories.
Amid the recent market swoon, munis such as MAAX have been among the best places to hide out. Plus, this fund has a tempting 30-day SEC yield of 3.01%, confirming the income credibility associated with this asset class.
Oakmark Investor Fund (OAKMX)
Expense ratio: 0.88% per year
The Oakmark Investor Fund (MUTF:OAKMX) is gold-rated Morningstar fund and one of the names on the research firm’s list products that impress when it comes to tax efficiency. That’s an impressive when considering this is an actively managed mutual fund, an asset class known to be less tax efficient due to higher turnover than is found with passive ETFs and index funds.
OAKMX is a concentrated with about 50 holdings and a $1,000 minimum investment. While past performance doesn’t guarantee future returns, OAKMX has impressed over the long haul.
“Since the managers’ 2000 start, the fund has doubled the gain of the large-blend Morningstar Category and stayed 3 percentage points annualized ahead of the benchmark,” according to Morningstar. “The team’s stock-picking should win out over time.”
While OAKMX allocates about a third of its weight to financial services stocks, that value tilt is offset with a growth feel via a roughly 40% combined weight to communication services, consumer discretionary and technology stocks.
As of this writing, Todd Shriber did not own any of the aforementioned securities. He has been an InvestorPlace contributor since 2014.
