Tax-Equivalent Yield: Why High Yield Munis Can Outperform
May 21, 2026
Read Time 4 MIN
Key Takeaways:
- Tax-equivalent yield adjusts a muni bond’s tax-free income to show what a taxable bond would need to yield to match it after taxes.
- For investors in a high federal tax bracket, high yield munis can offer meaningfully higher after-tax income than corporate high yield.
- Triple tax-free status in certain states pushes the advantage even further, making high yield munis a compelling income tool for tax-sensitive portfolios.
What Is Tax-Equivalent Yield and Why Does It Matter?
Tax-equivalent yield (TEY) is the pre-tax yield a taxable bond would need to offer in order to match the after-tax income of a tax-exempt municipal bond. It’s the standard way to compare munis and taxable bonds on a level playing field.
This matters because a muni bond yielding 4% isn’t directly comparable to a corporate bond yielding 5%. Once you account for the taxes owed on the corporate bond’s income, the muni may actually deliver more cash to the investor. TEY makes that comparison explicit.
How Is Tax-Equivalent Yield Calculated?
The formula is straightforward: divide the muni yield by (1 minus the investor’s marginal tax rate). For example, a 4% muni yield for an investor in the 32% federal bracket produces a TEY of 5.88%. That means a taxable bond would need to yield at least 5.88% to deliver the same after-tax income.
The higher the tax bracket, the more valuable the tax exemption becomes, and the higher the TEY climbs.
Tax-Equivalent Yield by Federal Tax Bracket
| Federal Tax Bracket (%) | Muni Yield (%) | Tax-Equivalent Yield (%) | TEY Advantage (%) |
| 22 | 4.00 | 5.13 | +1.13 |
| 24 | 4.00 | 5.26 | +1.26 |
| 32 | 4.00 | 5.88 | +1.88 |
| 35 | 4.00 | 6.15 | +2.15 |
| 37 | 4.00 | 6.35 | +2.35 |
Assumes a 4% muni yield for illustrative purposes. TEY = Muni Yield / (1 - Federal Tax Rate).
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How Do High Yield Munis Push Tax-Equivalent Yield Even Higher?
High yield munis start with a higher base yield than investment grade munis, which amplifies the TEY advantage. A high yield muni yielding 5% in the 35% bracket produces a TEY of 7.69%, a level that many corporate high yield bonds struggle to match consistently.
Because the tax exemption applies to the full coupon, the absolute dollar benefit of tax-free status grows as the yield increases. This makes the high yield segment of the muni market particularly attractive for income-focused investors in higher brackets.
Why Corporate High Yield Often Loses to Munis on an After-Tax Basis
Corporate high yield bonds may offer higher nominal yields, but that income is fully taxable at federal (and often state) rates. For an investor in the 35% bracket, a 7% corporate yield shrinks to roughly 4.55% after federal taxes alone. A high yield muni yielding 5% keeps the full 5%.
This after-tax gap is why many advisors and high-net-worth investors increasingly view high yield munis as a core income allocation rather than a niche holding.
What Is Triple Tax-Free Status and Who Benefits Most?
Municipal bonds issued within an investor’s home state are often exempt from federal, state, and local income taxes. This triple tax-free status can push TEY significantly higher, especially in high-tax states like California, New York, and New Jersey.
For a New York City resident in the top federal bracket who also faces state and city income taxes, the combined marginal rate can exceed 50%. In that scenario, a 4% triple tax-free muni has a TEY above 8%, making it extremely difficult for taxable alternatives to compete.
How to Access High Yield Muni Exposure
The VanEck High Yield Muni ETF (HYD) tracks the ICE Broad High Yield Crossover Municipal Index, providing broad exposure to the U.S. dollar-denominated high yield, long-term, tax-exempt municipal bond market. For investors seeking a shorter-duration option, the VanEck Short High Yield Muni ETF (SHYD) focuses on the 1 to 12 year maturity range within the same high yield muni universe.
Both funds offer a straightforward way to access the tax-equivalent yield advantage of high yield munis within a diversified, index-based framework.
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Important Disclosures
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors incomes may be subject to the Federal Alternative Minimum Tax (AMT) and taxable gains are also possible.
There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer duration fixed-income securities and during periods when prevailing interest rates are low or negative.
ICE Broad High Yield Crossover Municipal Index (MHYX) is intended to track the overall performance of the U.S. dollar denominated high yield long-term tax-exempt bond market.
An investment in the VanEck High Yield Muni ETF (HYD) may be subject to risks which include, among others, municipal securities, high yield securities, credit, interest rate, call, private activity bonds, industrial development bond, health care bond, special tax bond, California, New York, market, operational, sampling, index tracking, tax, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, and index-related concentration risks, all of which may adversely affect the Fund. High-yield municipal bonds are subject to greater risk of loss of income and principal than higher-rated securities, and are likely to be more sensitive to adverse economic changes or individual municipal developments than those of higher-rated securities. Municipal bonds may be less liquid than taxable bonds. A portion of the dividends you receive may be subject to the federal alternative minimum tax (AMT). There is no guarantee that the Fund’s income will be exempt from federal, state or local income taxes, and changes in those tax rates or in alternative minimum tax rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. Capital gains, if any, are subject to capital gains tax.
An investment in the VanEck Short High Yield Muni ETF (SHYD) may be subject to risks which include, among others, municipal securities, credit, interest rate, high yield securities, industrial development bond, Illinois, New York, call, private activity bonds, market, operational, sampling, index tracking, tax, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, and index-related concentration risks, all of which may adversely affect the Fund. High-yield municipal bonds are subject to greater risk of loss of income and principal than higher-rated securities, and are likely to be more sensitive to adverse economic changes or individual municipal developments than those of higher-rated securities. Municipal bonds may be less liquid than taxable bonds. A portion of the dividends you receive may be subject to the federal alternative minimum tax (AMT).There is no guarantee that the Fund’s income will be exempt from federal, state or local income taxes, and changes in those tax rates or in alternative minimum tax rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. Capital gains, if any, are subject to capital gains tax. The Fund’s assets may be concentrated in a particular sector and may be subject to more risk than investments in a diverse group of sectors.
Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333 or visit vaneck.com/etfs. Please read the prospectus and summary prospectus carefully before investing.
© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.
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Important Disclosures
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors incomes may be subject to the Federal Alternative Minimum Tax (AMT) and taxable gains are also possible.
There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer duration fixed-income securities and during periods when prevailing interest rates are low or negative.
ICE Broad High Yield Crossover Municipal Index (MHYX) is intended to track the overall performance of the U.S. dollar denominated high yield long-term tax-exempt bond market.
An investment in the VanEck High Yield Muni ETF (HYD) may be subject to risks which include, among others, municipal securities, high yield securities, credit, interest rate, call, private activity bonds, industrial development bond, health care bond, special tax bond, California, New York, market, operational, sampling, index tracking, tax, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, and index-related concentration risks, all of which may adversely affect the Fund. High-yield municipal bonds are subject to greater risk of loss of income and principal than higher-rated securities, and are likely to be more sensitive to adverse economic changes or individual municipal developments than those of higher-rated securities. Municipal bonds may be less liquid than taxable bonds. A portion of the dividends you receive may be subject to the federal alternative minimum tax (AMT). There is no guarantee that the Fund’s income will be exempt from federal, state or local income taxes, and changes in those tax rates or in alternative minimum tax rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. Capital gains, if any, are subject to capital gains tax.
An investment in the VanEck Short High Yield Muni ETF (SHYD) may be subject to risks which include, among others, municipal securities, credit, interest rate, high yield securities, industrial development bond, Illinois, New York, call, private activity bonds, market, operational, sampling, index tracking, tax, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, and index-related concentration risks, all of which may adversely affect the Fund. High-yield municipal bonds are subject to greater risk of loss of income and principal than higher-rated securities, and are likely to be more sensitive to adverse economic changes or individual municipal developments than those of higher-rated securities. Municipal bonds may be less liquid than taxable bonds. A portion of the dividends you receive may be subject to the federal alternative minimum tax (AMT).There is no guarantee that the Fund’s income will be exempt from federal, state or local income taxes, and changes in those tax rates or in alternative minimum tax rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. Capital gains, if any, are subject to capital gains tax. The Fund’s assets may be concentrated in a particular sector and may be subject to more risk than investments in a diverse group of sectors.
Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333 or visit vaneck.com/etfs. Please read the prospectus and summary prospectus carefully before investing.
© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.