Looking for tax-free returns and some of the fattest yields in the bond market? Consider funds that invest in the high-yield segment of the municipal bond market.

According to BofA Securities, this is a great time to buy these bonds, which are issued by turnpike authorities, hospitals, and other state and local entities.

Jared Woodard, BofA’s head of exchange-traded fund strategy, says high-yield munis have low default rates, with credit risk similar to that of investment-grade corporate bonds. That means investors can harvest some of the highest muni yields in recent history while keeping credit risk in check.

“High-yield munis offer 8% to 9% yields on a tax-adjusted basis, near the highest levels since 2017, but with less default risk than high-yield corporate bonds,” says Woodard. “You’re getting more yield for less risk. That’s a pretty compelling place to be in fixed income.”

He says that over the past year, high-yield muni ETFs suffered outflows while investors poured money into long-term Treasury bond ETFs. That may have been the wrong call.

“We think it’s an extremely unattractive trade to sell the high-yielding, lower-duration asset—that is, lower risk of interest rates and inflation—in order to buy funds that give you less yield and have more risk from inflation,” he says.

Newsletter Sign-up With tax day a month away, it’s worth considering potential tax drags on your portfolio. Corporate-bond coupon payments are usually taxed as ordinary income whether they’re reinvested or not, says BofA, while most muni bond coupons are exempt from federal, and sometimes state, taxes.

BofA’s three top-rated muni bond ETFs—which have a “1” rating that is equivalent to a Buy—have the most attractive credit exposures in the firm’s coverage, along with above-average yields. They are the SPDR Nuveen Bloomberg High Yield Municipal Bond ETF (ticker: HYMB), VanEck High Yield Muni (HYD), and First Trust Municipal High Income (FMHI). BofA calculates the tax-adjusted yields as 8.7%, 8.5%, and 6.3%, respectively.

The $2.5 billion SPDR ETF has an expense ratio of 0.35% and returned 7.73%, on a total return basis, in 2023.

The VanEck ETF, which has $2.9 billion in assets and charges 0.32%, launched in 2009 and was the first high-yield muni ETF to come to market, says Jim Colby, senior municipal strategist at VanEck. It was up 6.52% in 2023.