Hidden Value in Muni Bonds: Why Closed-End Funds Are a Bargain Today

And right now, municipal bond CEFs offer some of the biggest bargains.

With yields high and the ability to buy munis on the cheap, investors looking for income solutions should consider muni CEFs for portfolios. Overall, with discounts still below historic averages, investors have plenty of opportunities in the sector.

CEF’s quirky nature is what sets it apart as an excellent vehicle for many asset classes. Unlike open-ended mutual funds or ETFs, CEFs are “closed” in that they have an initial offering and a set number of shares. After that, investors buy and sell their holdings on the major exchanges. There is no creation/redemption mechanism like ETFs, and proceeds from sales do not come directly from the fund’s assets like mutual funds.

This uniqueness has worked for investor’s benefit in several ways.

For starters, because the managers of the fund are not subjected to the whims of investor withdrawals, they can own less-liquid securities, including senior loans, various asset-backed securities, and gold. And now private credit and equity are starting to make their way into CEFs. This ability to buy & hold illiquid assets has also made closed end funds some of the biggest buyers of municipal bonds.

Secondly, because CEFs have a fixed number of issued shares and trade throughout the day, their value is dictated by supply/demand. The whims of investors determine how much people pay for a share of the CEF, meaning they can and often trade at discounts to their underlying net asset values. For example, investors can buy one dollar worth of assets for 80 cents or so.

The combination of these two factors can often lead to some big opportunities for investors and their portfolios.

Right now, muni bond CEFs could be that opportunity. The majority of the sector is trading for a discount to their net asset values, and the discounts remain near average lows.

Looking at the RiverNorth Municipal Closed-End Fund Index – which is an equal weighted index of 50 national municipal closed-end funds – the top 50 largest muni CEFs are trading at an average weighted discount to their NAVs of 4.48%. This chart from RiverNorth highlights the current discount in context of last year. ¹

Source: RiverNorth

Putting the discount into context, muni CEFs were trading at just a 1.5% discount back in 2022 before the Fed started its tightening cycle and inflation was still ramping up.

Because of the previous tightening cycle, muni bond yields are also up. The discount to NAV allows investors to lock-in even more yield. Because shares are trading for less than their NAV, the yield is higher. An added benefit is the regulated leverage, which CEFs can employ to boost yields further. As such, the average muni CEF is paying a tax equivalent distribution rate of 6.9%, almost two full percentage points higher than the yield on a muni bond mutual fund.

One last benefit of the significant muni bond CEF discount is tax. We all know that the interest on muni bonds- even leveraged interest, can be free of federal and state taxes. However, Uncle Sam can tax muni bond investors via an obscure section of the Internal Revenue Code (IRS) called the de-minimis tax rule. Basically, the de-minimis rule determines whether the price appreciation of a muni security purchased at a discount will be taxed as ordinary income or the capital gains.

The win is that investors are buying the fund at a discount to its NAV. Whether or not the bonds inside the CEF are trading below par is a different story. Secondly, many good muni bond managers will only purchase bonds at premiums or only slight discounts to face value. In short, with CEFs investors can buy muni bonds at a discount without running afoul of the de-minimis tax rule.

Clearly there are benefits to buying munis within the CEF structure, especially if you can get those benefits without paying too much. With discounts still high on several muni bond CEFs, it makes sense to explore this investment vehicle for your taxable account as an income solution.

Adding them is easy. As one of the largest sectors covered by CEFs, there are numerous choices within the sector, albeit the choices are slimming down with many firms starting to merge funds together for ease of use.

Another choice could be the VanEck CEF Muni Income ETF. The fund provides exposure to over 50 different muni CEFs that trade at discounts to the NAVs. For investors looking to go broad, this could be a viable option.

These funds were selected based on their large discounts to the NAV. They are sorted by their YTD total return, which ranges from 1.4% to 4.2%. They have expense ratios between 0.60% to 3.84% and assets under management between $428M to $1.9B. They are currently yielding between 4.2% and 7.4%.

All in all, the CEF structure provides muni bond investors with a lot of benefits, which are trading for big discounts to their NAV. This allows investors to grab higher yields at a bargain.

CEFs shouldn’t be ignored by investors looking for income. In the muni space, there is a lot of value with this structure. Larger yields, tax benefits and big discounts await investors willing to consider CEFs for their portfolios.

¹ RiverNorth (October 2025). Municipal CEF Index