Municipal Bond ETFs as a Tax-Efficient Income Strategy in a Rising Rate Environment: Analyzing LMUB's Stability and Yield Potential

In a rising interest rate environment, municipal bond ETFs have emerged as a compelling tool for tax-sensitive investors seeking stable income. The iShares Long-Term National Muni Bond ETF (LMUB), which tracks long-term U.S. municipal bonds with maturities of 12 years or more, offers a unique blend of tax-exempt yields and exposure to a sector historically less correlated with Treasury markets [1]. However, its long-duration profile exposes it to price volatility when rates rise. This article evaluates LMUB’s performance during recent rate hikes (2022–2025) and assesses its viability as a tax-efficient income strategy.

The Tax-Exempt Advantage in a High-Yield Environment

Municipal bonds, such as those held by LMUB, provide income exempt from federal (and often state/local) taxes, making them particularly attractive for high-income investors. For example, the Vanguard Long-Term Tax-Exempt Bond ETF (VTEB) offers a 3.8% yield, which translates to a tax-equivalent yield of ~6.4% for investors in the 40.8% tax bracket—significantly outperforming taxable alternatives like the Vanguard Taxable Municipal Bond ETF (VCIT) [1]. While LMUB’s yield of ~1.53% as of August 2025 appears modest, its tax-exempt status amplifies its appeal for those prioritizing after-tax returns [4].

LMUB’s Performance During Rising Rates: A Mixed Record

The Federal Reserve’s aggressive rate hikes from 2022 to 2024 tested the resilience of long-duration bond ETFs like LMUB. Historical data reveals a challenging 2022, with LMUB posting a -7.35% return as rising rates pressured bond prices [3]. This aligns with broader trends: municipal bond ETFs, including the iShares National Muni Bond ETF (MUB), underperformed in 2022 due to duration risk and investor redemptions [2]. However, 2023 brought a rebound, with LMUB returning 5.56%, reflecting improved market sentiment and a steepening yield curve [3]. By 2024, returns moderated to 1.26%, indicating a more stable but less dynamic environment [3].

In 2025, LMUB’s performance has been mixed. As of July 2025, it posted a -1.1% return, underperforming the Muni National Long category average of -0.7% [5]. Yet, its year-to-date return of 0.00% as of August 28, 2025, suggests a stabilization amid expectations of Fed rate cuts [5]. This volatility underscores the dual-edged nature of long-duration munis: while they benefit from higher yields in a rising rate environment, their prices remain sensitive to rate expectations.

Navigating Duration Risk and Fiscal Fundamentals

LMUB’s exposure to long-term municipal bonds inherently carries higher duration risk. When interest rates rise, the fund’s net asset value (NAV) declines, as seen in 2022. However, municipal bonds often exhibit greater resilience than Treasuries due to their tax-exempt status and strong credit fundamentals. Most municipalities maintain robust credit quality and sufficient liquidity to weather economic downturns [2]. For instance, the Bloomberg U.S. Aggregate Bond Index gained 3.6% in July 2025, reflecting improved expectations for monetary policy normalization [2].

The 2025 municipal bond market also benefited from a steep yield curve, with long-term bonds offering attractive real yields. Yields on the Bloomberg Municipal Long Bond Index (22+) surged to 6.91% on a tax-equivalent basis, the highest in nearly two years [3]. This environment has drawn income-seeking investors, particularly as Treasury yields plateaued and fiscal expansion bolstered economic growth [5].

Strategic Considerations for Investors

For investors considering LMUB, the key is balancing yield potential with duration risk. While the fund’s tax-exempt income provides a hedge against rising rates, its long-term structure means it will lag in price appreciation during rate cuts. Diversification with shorter-duration municipal ETFs or floating-rate notes (FRNs) can mitigate this risk [4]. Additionally, LMUB’s 0.09% expense ratio makes it a cost-effective option for those prioritizing tax efficiency [3].

Conclusion

The iShares Long-Term National Muni Bond ETF (LMUB) exemplifies the trade-offs inherent in municipal bond investing during rising rate cycles. While its 2022 struggles highlight the risks of long-duration exposure, its 2023 and 2024 recoveries underscore the sector’s resilience and tax advantages. For high-income investors, LMUB remains a compelling option in a diversified portfolio, provided they are prepared for short-term volatility and prioritize after-tax returns. As the Fed’s policy trajectory evolves, LMUB’s performance will hinge on the interplay between rate expectations, fiscal policy, and the enduring strength of municipal credit fundamentals.

Source:
[1] Optimizing After-Tax Returns with Tax-Exempt Municipal Bond ETFs in a High-Yield Environment [https://www.ainvest.com/news/optimizing-tax-returns-tax-exempt-municipal-bond-etfs-high-yield-environment-2508/]
[2] Municipal Bonds: Mid-Year 2025 Outlook [https://www.schwab.com/learn/story/municipal-bond-outlook]
[3] iShares National Muni Bond ETF (MUB) Performance History [https://finance.yahoo.com/quote/MUB/performance/]
[4] Building a Resilient Bond Portfolio in the New Inflation and Interest Rate Era [https://www.ubp.com/en/news-insights/newsroom/building-a-resilient-bond-portfolio-in-the-new-inflation-and-interest-rate-era]
[5] Weekly Fixed Income Commentary | 08/25/2025 [https://www.nuveen.com/en-us/insights/investment-outlook/fixed-income-weekly-commentary]