A Muni Fund That Pays More

Fund Watch

A Muni Fund That Pays More

USAA Tax Exempt Intermediate-Term takes on a little more risk to pick up extra yield.

It’s been a feeble year for municipal bond funds. But if you’re looking for decent yield and you’re in a high tax bracket, muni bonds, which pay interest that is generally free of federal income taxes, still make sense. A fund worth looking at is USAA Tax Exempt Intermediate-Term (symbol USATX).

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The fund, with 68% of its assets in debt rated single-A and triple-B, holds more bonds on the lower end of the investment-grade spectrum than its typical peer. Those bonds offer more yield than triple-A-rated IOUs. Managers Regina Shafer and Diederik Olijslager are willing to move down the credit-risk ladder because they have confidence in their research team. Five analysts pick apart every prospective bond, choosing only the ones that pay enough to offset any risks. “First, it’s credit research,” says Shafer. Next, she asks, “Can we get this at the right price?”

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But the fund stands out from its peer group in other ways, too. The typical intermediate-term muni-bond fund spreads its assets over bonds with short, medium and long matur­ities. The USAA fund bulks up in the middle of the spectrum, with some 70% of its assets in bonds with matur­ities of seven to 15 years, more than twice that of its typical peer, according to Morningstar.

USAA’s 2.4% yield is equivalent to a taxable yield of 4.2% for an investor in the top federal tax bracket.

* Annualized for five years. @ Rankings exclude share classes of this fund with different fee structures or higher minimum initial investments. S Front-end load; redemption fee may apply. Data copyright 2014 Morningstar Inc.