How Muni-Bond Funds Navigated a Bumpy Ride in 2025

The municipal-bond market delivered inconsistent returns over 2025, with performance pressured early in the year by uncertainty around federal tax legislation, heavy new-issue supply, volatility around tariffs, and seasonal selling to satisfy spring tax bills. Performance improved in August as prices were boosted by interest rate cuts and a moderation in new issues. Solid demand was met by more restrained issuance, turning mutual fund flows positive and bringing spreads tighter, which supported stronger total returns toward the end of the calendar year.

Here we look at how four municipal-bond funds have fared since earning their current Morningstar Medalist Ratings.

Fidelity Tax-Free Bond FTABX has earned a Gold rating since Morningstar started assigning them in November 2011. Experienced leadership, a disciplined approach, and attractive fees have contributed to its success. The team uses a bottom-up fundamental process, and Fidelity continues to hone an impressive suite of comprehensive proprietary tools that support the efficient and straightforward approach here. The team monitors muni market risks and opportunities with precision through several lenses, including credit quality, dislocations along the maturity curve, and structural traits such as coupons and call features. The strategy tends to lag its more aggressive peers when the muni market rallies, because of the team’s relatively conservative approach, yet strong downside protection and thorough security selection have driven the strategy‘s long-term success. Its 3.4% annualized return from December 2011 through January 2026 beat roughly two-thirds of rivals in the muni-national long Morningstar Category.

Vanguard Limited-Term Tax-Exempt VMLTX has also remained a high-conviction fund for muni investors interested in taking less interest rate risk, earning a Silver rating since November 2011. The strategy’s experienced leaders employ a disciplined approach to create a high-quality, diversified portfolio, while its ultralow fee consistently gives it an edge. The team keeps the strategy’s duration in line with that of the Bloomberg Municipal 1-5 Year Index, and the portfolio’s positioning has reflected sectors that are prominent on the short end of the muni curve, such as hospital-backed revenue bonds and state and local general-obligation bonds. The fund’s 1.8% annualized return from December 2011 through January 2026 topped over four-fifths of peers in the muni-national short category.

Investors looking for tax-free income in states with higher income tax rates also have strong options. For example, Vanguard New York Long-Term Tax Exempt VNYTX, which has carried a Silver rating since November 2011, continues to add value for investors with its thoughtful approach to the New York muni market. The strategy’s higher-quality profile and ultralow fees provided some protection for investors in down markets in the past several years. In the choppy markets of 2022, the team’s selection in university revenue bonds helped the strategy lose 47 basis points less than its average peer. Even when credit-heavy bonds outperformed investment-grade debt in 2024, this fund remained competitive despite lower exposure to below-investment-grade debt. For example, the fund’s 2.0% return outpaced the index by 114 basis points but trailed its peer median just by 3 basis points. The fund’s 3.2% annualized return from December 2011 through January 2026 topped over two-thirds of rivals in the muni New York Long category.

Earning a Gold rating in March 2022, Vanguard California Long-Term Tax Exempt VCLAX has been a standout for California-based investors. The fund’s 1.8% annualized return from early 2022 through January 2026 beat nearly three-fourths of category rivals, aided by strong selections in local and state general-obligation bonds and municipal bonds backed by revenue in the hospital and higher education institutions. Like other muni funds offered by Vanguard, this strategy is run by a large and thorough team, leans on higher-quality offerings, and offers low fees to tax-conscious investors.

This article first appeared in the January 2026 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting this website.