After going through a bunch of tax laws recently, I'm interested in knowing if muni bonds should replace an index bond fund within a portfolio.
Looking at two different funds for comparison purposes (VBTLX and VOHIX).
VTBLX has provided investors with a 3.20% return over a 10-year period, after taxes on distributions (federal only is computed here, yes?). Meanwhile, VOHIX has provided investors with a 4.61% return over a 10-year period. The fund is a bit riskier, which I understand. However, it offers federal and state tax advantages. While the fund profile says that it benefits those found within higher tax brackets, would it not benefit those in the 15% bracket quite a bit as well, since not only are they not paying federal tax on their dividends, but state tax as well?
I guess I'm looking to receive some input on the ability of a muni-bond fund to replace a bond index fund within a portfolio. Obviously, from what I have read, the community tends to favor index funds (which I agree with). However, when looking at bonds, would it not be smart, if you are in a state that offers state-tax free municipal bonds, to invest in those instead?
Thanks all.