By Todd Rosenbluth, S&P Capital IQ, The Outlook

For investors looking to pick up tax-advantaged yield, high-yield municipal bond funds are an attractive option because they spread the risk of default across many individual issues and a management team is scrutinizing the fund's holdings.

Of the 125 high-yield municipal bond fund share classes ranked by S&P Capital IQ, only three have our highest five-star ranking. While the credit risk for all three is relatively high, we believe that risk is offset by the high yield.

Columbia High Yield Municipal (SRHMX) manager Chad Farrington took the helm in 2009 and in the past three years has delivered performance in line with its high-yield peers while incurring below-average volatility.

The fund lagged in 2009 but outpaced the group in 2010 and 2011. It is 26 basis points behind for the year to date through March 9.

As of January 2012, our research shows the fund as having 30% of its assets in bonds rated BBB or equivalent and 15% in bonds rated A, while 34% are not rated.

Combined, the fund receives negative ranking inputs for its elevated credit risk and the duration of its holdings, but this is counterbalanced by an above-average 4.6% 30-day SEC yield.

Also helping the fund earn its five-star ranking is its modest 0.6% expense ratio and below-average 23% turnover rate.

Invesco Van Kampen High Yield (ACTDX) is managed by a team of five and has delivered top-quartile performance record over the past one and three year periods ending March 9 while incurring modestly lower volatility.

The fund has bested its high yield peers in each of the last three calendar years, though it is lagging slightly so far in 2012.

Even with duration that is lower than its peers, its 30-day SEC yield of 5.5% is over 100 basis points higher than its peer average. Further aiding the fund’s five-star ranking is its 0.65% expense ratio and 20% turnover rate.

T. Rowe Price Tax Free High Yield (PRFHX) has outperformed its peers in all but two full calendar years since manager James Murphy assumed the helm in 2004, supporting its top-quartile three and five-year annualized records.

Its duration is modestly below its peers as is its 4.3% 30-day SEC yield. Contributing to the overall five-star ranking is the fund’s 0.68% net expense ratio and 24% turnover rate.

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