The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage. The opinions expressed are those of the author and do not represent the views of TheStreet or its management.

By Alexander Green , Investment U's Chief Investment Strategist

NEW YORK ( InvestmentU ) -- Let's assume you agree that the selloff in municipal bonds is overdone and they're due for a rebound. How do you play it?

You have three primary choices...

1. Buy a low-cost municipal bond fund.
2. Invest in a closed-end bond fund.
3. Buy individual tax-free bonds.

Let's take the last one first. If you buy individual bonds, you'll see their price fluctuate. But if you hang on -- and there's no default -- you're guaranteed of receiving $1,000 per bond at maturity.

Thirty-year AAA and insured tax-free bonds are currently yielding 5.1%. If you're in the 35% tax bracket, you'd have to earn almost 8% taxable to receive that kind of after-tax return. Not bad.

Worried that the municipality and the insurer could both default? (Unlikely, but not impossible.) Then buy only tax-free bonds insured by Berkshire Hathaway Assurance Co., a subsidiary of Berkshire Hathaway ( BRK.A) with a stellar AAA-credit rating. You can't get much safer than that.

And if you don't want to select individual bonds?

The Low-Cost Muni Bond Option

Option #1 above includes investing in a low-cost fund like the Vanguard Long-Term Tax-Exempt Fund ( VWLTX). The current yield is 4.21% and the average maturity is just over 10 years.

Sure, it yields less than some individual bonds and there's no guarantee of principal. But it will be less volatile than 20- or 30-year bonds and you can reinvest monthly dividends if you're so inclined. (Those in high-tax states will want to choose a state-specific Vanguard fund, of course.)

Want to play a potential muni-bond rebound more aggressively, with a higher yield and greater capital appreciation potential? Go for Option #2...

Why You Should Pick Up Tax-Free Bonds Now

Consider the Nuveen Insured Municipal Opportunity Fund ( NIO). This closed-end fund also holds a portfolio of high-grade tax-free bonds. The annual expense ratio is 1%. Although this is higher than Vanguard, it's actually cheap by closed-end fund standards. Many closed-end funds have expenses that total more than 2% per year.

This fund currently yields 6.5% and the income is exempt from federal taxes. If you reside in the top tax bracket, you'd have to earn 10% to get this after-tax yield. Why is it so high? Because the fund is using 41% leverage, the equivalent of buying bonds on margin. If muni bond prices recover, however, this fund will really jump.

But will they? I don't have a crystal ball. But recognize this: The yield on the benchmark index of 30-year AAA municipal bonds is higher now than in the depths of the recent credit crisis.

If you're any kind of contrarian, now looks like a good time to pick up some tax-free bonds.
More on Muni Bonds
Muni Fear Can Be Investor Opportunity
The Muni Crisis In Quotes
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.