Muni Bonds On The Cheap With This Vanguard ETF

Municipal bonds and the relevant exchange traded funds are prime destinations for conservative fixed-income investors.

Some of these funds feature access to a wide range of municipal debt at favorable price points. That group includes the Vanguard Tax-Exempt Bond ETF VTEB.

What Happened

VTEB debuted in August 2015 as Vanguard's first municipal bond ETF, but the fund issuer had a rich tradition in municipal bond mutual funds prior to VTEB's launch. Today, VTEB has more than $4.1 billion in assets under management, putting it in the upper echelon of municipal bond ETFs in terms of size.

VTEF follows the S&P National AMT-Free Municipal Bond Index and holds nearly 4,200 bonds.

“The fund has a short track record, and the managers have stayed close to the target index over its life,” Morningstar said in a recent note. “From its launch in August 2015 through December 2018, the fund’s total and risk-adjusted returns outperformed nearly three-fourths of its peers.”

Why It's Important

Large states are typically major issuers of municipal debt, which can introduce some element of concentration risk in cap-weighted municipal bond funds, of which VTEB is one.

“At the end of December 2018, the fund had greater exposure to California and New York than the category average,” according to Morningstar. “It collectively allocated one-third of its assets to these states, while the average fund in the category had a 16-percent stake. Both these states have relatively high credit ratings, so higher-than-average exposure doesn’t hurt the fund’s overall credit risk.”

VTEB's credit risk is minimal, as 91.5 percent of the fund's holdings are rated AAA, AA or A, according to issuer data. The fund's holdings have an average duration of 5.9 years.

What's Next

At the end of last year, VTEB yielded about 4 percent, or 70 basis points more than the Bloomberg Barclays U.S. Aggregate Bond Index. Another reason investors embrace this Vanguard fund: its low fee of 0.09 percent per year, or $9 on a $10,000 investment.

“From its launch in August 2015 through December 2018, it beat the category average by 24 basis points annually, which was better than two-thirds of its competitors,” Morningstar said. “Its risk-adjusted performance over this period, as measured by Sharpe ratio, also landed in the top third of the category.”

Morningstar has a Silver rating on VTEB.

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