Municipal Bond Mutual Fund Performance: Fees, Duration, and Geographic Focus

This study examines the cross-sectional determinants of performance among 484 active US municipal bond mutual funds over 1-, 5-, 10-, 20-, and 30-year cumulative total return horizons, using Bloomberg fund data spanning 1995 to 2025. It is the first study to employ Bloomberg total returns and the first to systematically compare state-focused against national municipal funds. Expense ratios are the dominant predictor of investor outcomes across all specifications, with each additional percentage point reducing cumulative returns by 80 basis points at 1 year and 47.91 percentage points at 30 years for national funds. State-focused funds charge significantly higher front-end loads and expense ratios, and a state-focused × expense ratio interaction reveals a disproportionate fee penalty for state-focused investors at the 20-year horizon. A robust duration risk premium and a long-run credit risk premium for high-yield funds are documented across specifications. Robustness tests using the information ratio (IR) and Sortino ratio confirm that performance gaps reflect cost differences rather than inferior investment skill. Active-versus-passive comparisons show pervasive underperformance rising from 77.2% of funds at 1 year to 91.7% at 30 years.