XMPT: A Steady Harbor for Tax-Free Income in a Rising Rate World

As the Federal Reserve continues its aggressive rate-hiking cycle, income-seeking investors face a stark challenge: how to generate steady cash flow without overexposure to interest rate risk. Enter the VanEck Vectors CEF Municipal Income ETF (XMPT), a fund designed to navigate this environment by delivering tax-exempt municipal bond income through a unique closed-end fund (CEF) lens. With a 30-Day SEC Yield of 5.37% as of June 2025 and monthly distributions, XMPT offers a compelling path to tax-advantaged income in an era where every dollar saved on taxes counts.

The Tax Advantage: Why XMPT Stands Out

Municipal bonds have long been a staple for investors in high tax brackets, as their interest is exempt from federal—and often state—taxes. XMPT amplifies this benefit by tracking an index of CEFs that specialize in municipal debt. For a taxpayer in the 32% federal bracket, XMPT's 5.37% yield becomes a taxable-equivalent 7.90%, effectively outperforming many taxable bond funds. This math becomes even more compelling at higher tax rates: a 37% taxpayer would see their effective yield jump to 8.52%.

Riding the Rate Cycle with Closed-End Fund Leverage

XMPT's strategy hinges on its portfolio of CEFs, which often use leverage to amplify returns. In a rising rate environment, this structure can work to investors' advantage. When rates rise, shorter-duration municipal bonds—like those held in some of XMPT's top holdings such as Nuveen's NAD and NEA—tend to stabilize faster than longer-term issues. Meanwhile, the CEFs within XMPT may employ leverage to boost income, though this comes with risks.

The fund's 51.01% allocation to its top 10 holdings, including BlackRock's BTT and Invesco's VMO, reflects a deliberate focus on CEFs with proven income-generation track records. While this concentration might worry some, it aligns with the fund's goal of accessing niche opportunities within the municipal space—opportunities often overlooked by broader ETFs.

Performance Through a Rate Hike Gauntlet

XMPT's recent returns have been uneven. The fund's NAV dropped 5.25% in January 2025 as rates surged, but it rebounded with a 6.85% YTD return through May. This volatility underscores the risks of bond investing in a volatile rate environment—but also highlights the resilience of its tax-free income stream. Over five years, XMPT has delivered a 2.69% annualized return, outpacing the broader municipal bond market during periods of tax-rate uncertainty.

Critically, XMPT's Beta of 0.42 and low standard deviation (0.56%) suggest it's less volatile than broader markets, a trait that could prove valuable as economic uncertainty grows.

Navigating Risks: Leverage, Credit, and Concentration

No strategy is without risk. XMPT's reliance on leveraged CEFs means it faces amplified credit risk if issuers default. Additionally, its heavy concentration in top holdings (98.08% in the top 50) leaves it vulnerable to underperformance in key CEFs. Investors must also weigh its 1.98% expense ratio—high for an ETF—against its specialized approach.

Yet for those prioritizing tax-free income, these costs may be justified. The fund's monthly distributions, which have remained consistent despite market turbulence, provide a steady cash flow that can be reinvested or used for living expenses.

The Case for Immediate Action

As the Fed's rate path remains uncertain, XMPT offers a disciplined way to capture municipal bond income while minimizing tax drag. Its structure leverages the expertise of seasoned CEF managers, who navigate duration, credit quality, and leverage to sustain payouts.

For investors in the 32% tax bracket or higher, the math is clear: a 5.37% yield effectively becomes 7.90%, a return that rivals many taxable corporate bond funds. With monthly distributions providing predictable cash flow, XMPT could be a cornerstone of a tax-smart income portfolio.

Final Take

In an era where every dollar of income is taxed to the hilt, XMPT's tax-free dividends and disciplined strategy make it a standout option. While risks like credit defaults and CEF leverage deserve attention, the fund's ability to deliver consistent monthly cash flow in a rising rate environment is unmatched. For income investors willing to prioritize tax efficiency over capital gains, XMPT is a buy—now more than ever.