With U.S. Treasury yields at phenomenally low levels, many traders are looking for other conservative investments choices that are offering higher yields, and many are turning to municipal bond funds.

[VIDEO] Cashing in On Municipal Bond Funds

Municipal bond funds are especially attractive these days because they are conservative, they have relatively high yields and the returns are federal tax free. (If you want to compare the yields of various bonds, check out How to Calculate a Bond’s Yield.)

What are Municipal Bonds?

Municipal bonds–often referred to as “munis”–are bonds that are issued by municipalities to raise money for projects ranging from road construction projects and new power plants to building parks and zoos.

Munis work no differently than any other bond. Munis have a face value, a coupon rate and a maturity date. However, munis do have one distinct advantage over other bonds—they provide tax-free earnings.

The Federal Government does not count earnings from munis as part of your taxable income. This tax treatment helps incentivize individuals to invest in municipal bonds.

Municipal Bond Funds

You could certainly go out and buy individual municipal bonds for your portfolio to take advantage of the tax breaks and the earnings potential, but there is an easier way to go about it. You can invest in a municipal bond fund.

In a municipal bond fund like the Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares (NSDQ: VWITX), you gain exposure to not one but hundreds of municipal bonds. This gives you fabulous diversification at a relatively low cost.

Image courtesy Steve Snodgrass.