VanEck Long Muni ETF (MLN): A Tax-Advantaged Anchor for Income Investors in a Rising Rate World

The relentless climb in interest rates since 2022 has upended traditional income strategies, leaving investors scrambling to balance yield with safety. For those in high tax brackets, municipal bonds remain a cornerstone of taxable-portfolio construction, and the VanEck Long Muni ETF (MLN) offers a compelling—but nuanced—option. Let's dissect its strengths, risks, and why it could still have a role in income-focused portfolios despite the challenges of a rising rate environment.

MLN's Core Advantage: Tax-Free Income with Steady Distributions

MLN tracks the ICE Long AMT-Free Broad National Municipal Index, a benchmark of long-term tax-exempt municipal bonds. Its monthly distributions currently offer an annual yield of 3.82%, outpacing both the ETF Database Category Average (3.19%) and the FactSet Segment Average (2.52%). This consistency is vital for retirees or income seekers reliant on steady cash flows.

The tax advantage is its crown jewel. Federal tax-exempt income means investors in the 37% bracket can effectively enjoy a tax-equivalent yield of 6.25%, while those in lower brackets still benefit significantly. Even in a rising rate environment, this tax shield provides a critical edge over taxable bonds.

Performance in Rising Rates: Volatility, But a Structural Niche

The ETF's returns have been uneven in recent years. Over the past year (through January 2025), MLN returned 1.56%, lagging its index by -0.19% but outperforming shorter-duration peers. However, the 3-year return of -3.34% highlights the pain of prolonged rate hikes—long-duration bonds, which MLN emphasizes, are inherently sensitive to rising rates.

Yet here's the catch: long-term municipal bonds often offer higher yields than shorter-term alternatives once rates stabilize or decline. For investors with a 5+ year horizon, MLN could act as a “buy-the-dip” vehicle. Its focus on bonds maturing in 17+ years locks in current yields, which may look attractive if rates peak and retreat.

Key Considerations for Income Investors

1. Tax Bracket Matters More Than Ever

The higher your income, the more MLN's tax benefits amplify its appeal. For example:
- At 24% federal tax, the taxable equivalent yield jumps to 5.18%.
- At 37%, it reaches 6.25%, competing with high-yield corporate bonds but with far less credit risk.

This makes MLN ideal for state residents where the bonds are also exempt from state taxes, compounding the advantage.

2. Duration Risk: A Double-Edged Sword

While not explicitly stated, MLN's focus on long-term maturities implies a high duration risk—likely exceeding 10 years. This means its price will drop more sharply during further rate hikes. Investors must weigh this against the higher yield these bonds offer.

3. Expense Efficiency

MLN's 0.24% expense ratio is competitive, undercutting the category average of 0.35%. This keeps more of your returns in your pocket, a small but meaningful edge.

Investment Thesis: A Strategic Role, but Not for the Faint-Hearted

MLN is not a “set it and forget it” holding. Its suitability hinges on two factors:
1. Tax bracket: High earners gain the most from its tax shield.
2. Time horizon: Investors must be prepared for volatility in the short term but benefit from locked-in yields over the long term.

When to consider MLN?
- If you're in a high tax bracket and seek tax-free income.
- You're willing to absorb short-term price dips for the chance of higher yields when rates stabilize.
- Your portfolio lacks exposure to long-duration municipal bonds, which can diversify interest rate risk exposure.

When to avoid it?
- You're a short-term trader or rate-sensitive investor.
- You're in a low tax bracket (consider taxable bonds instead).
- You're overly risk-averse and fear further rate hikes.

Final Take

The VanEck Long Muni ETF is not a perfect tool, but it's a viable option for income-focused investors who prioritize tax efficiency and are willing to navigate rate volatility. Pair it with shorter-duration municipal ETFs (like VTEB) to balance duration risk, and keep an eye on Fed rate signals in 2025. For those who can stomach the ups and downs, MLN offers a rare combination of tax-free income and yield clout in an era where both are hard to find.

As always, consult a financial advisor before making investment decisions. Past performance does not guarantee future results.