Several new ETFs specializing in tax-exempt income hit the market this month just as investors are sorting through their 2022 tax filings. The Vanguard Short-Term Tax Exempt Bond ETF (VTES) and the Goldman Sachs Community Municipal Bond ETF (GMUN) both began trading on March 9, expanding the options for investors looking to reduce their tax burden in an area of the fixed income market that generally carries low risk for investors. Municipal bond funds can be particularly attractive to investors who face a high tax burden, because their payouts are tax exempt. This is on top of the tax benefits of the ETF wrapper in general, which helps shield investors from realizing gains on trades within the portfolio. "One of the beautiful things about a municipal bond ETF is that it brings tax efficiency from multiple angles," said Jeffrey Johnson, head of fixed income product at Vanguard. While the fund's payouts are lower than similar products that hold corporate bonds, the tax advantages make them competitive. The new funds haven't been active long-enough to show an official yield, but the more established iShares Short-Term National Muni Bond ETF (SUB) has a tax-equivalent yield of 4.74%. Another factor in favor of municipal bonds is the uncertain economic environment and fear of a possible recession. While state and local governments would be impacted by a recession, they are on strong footing after the federal response to the Covid pandemic helped to beef up their balance sheets. "There's still hundreds of millions of Covid stimulus sitting in muni coffers that can be spent. Munis are a great place for someone who's risk averse," said Jason Bloom, Invesco's senior director for global ETF strategy. The BulletShares fund family from Invesco offers several different muni funds with different maturity target dates for investors looking for more specific time-frames. That group expanded with the Invesco BulletShares 2032 Municipal Bond ETF (BSMW) , which launched on March 1. And the inflationary environment may actually be a good thing for the credit-worthiness of municipal bonds. Since many governments raise money through sales and income taxes, inflation can help boost government revenues. "We've seen pretty strong income tax receipts, property tax receipts, sales tax receipts over the past couple of years despite what was a really challenging environment during Covid time," said Alexa Gordon, municipal bond portfolio manager at Goldman Sachs Asset Management. The new funds Both the Vanguard and Goldman funds are based on indexes. The Vanguard fund tracks the the S & P 0-7 Year National AMT-Free Municipal Bond Index, and has an expense ratio of 0.07% For comparison, iShares SUB fund, the biggest in the space, holds bonds up to five years from maturity and the same expense ratio. Meanwhile, the Goldman fund is a little wider in scope, with a custom-made index incorporating bonds up to 15 years from maturity. Gordon said that was to capture additional yield and to include more bonds that fit within the fund's ESG goals. The Goldman fund is also more expensive, with an expense ratio of 0.25%. Is short-term still the play? Short-term bond funds were a hot area in late 2022, as the Fed's steep rate hikes and an inverted yield curve made the funds a way to generate solid income while minimizing interest rate risk. "By being shorter term, it allows them to minimize the interest rate sensitivity of their portfolio. So for investors who are worried about continued rising interest rates but they want to be exposed to municipal bonds, a short-term muni ETF can minimize their exposure to rising rates going forward," Johnson said. But the decision by Goldman and Vanguard to launch shorter term products may prove to be too late, at least in terms of rapid adoption. After seeing large investor interest last year, 2023 has been more of a mixed bag for short-term funds — the SUB has seen outflows so far this year, and its market price has only gone up about 1% this month despite a drop in Treasury yields. The new funds have less than $100 million in assets each. Despite their high credit quality, muni bonds don't always perform well in risk-off environments, at least in the short term, according to Lauren Goodwin, economist and director of portfolio strategy at New York Life Investments. "The tax-free muni space is dominated by retail investors, so when there is a spook in the market … municipal bonds aren't necessarily immune from those broader macro economic effects. That's the flows or the sentiment toward the asset class. But the fundamentals of the asset class historically have been very well diversified against other areas of the credit market," Goodwin said. However, the interest could soon pick up again. After short-term yields dropped sharply in the aftermath of the Silicon Valley Bank failure, the 2-year Treasury yield jumped back above 4% earlier this week.