To determine a fund's interest-rate risk, check its duration. Vanguard Insured Long-Term Tax Exempt, for example, only buys bonds that are insured against credit problems. For most of the 1990s, the strong economy masked the risks of high-yield municipal bonds. Some municipal-bond funds invest all over the country, while others focus on a single state. Single-state funds, meanwhile, provide residents with income that's exempt from both federal and state taxes.
Costs are important for all bond funds, but especially for municipal-bond funds.
A small cost advantage therefore goes a long way.