A Young Muni Bond ETF Comes Of Age

Age is nothing but a number with exchange traded funds, and many funds across various asset classes prove as much.

Among relatively young fixed income ETFs, the Vanguard Tax-Exempt Bond ETF VTEB is off to an impressive start.

What Happened

VTEB, which debuted in 2015, is CFRA Research's focus ETF for the month of August. Vanguard's first municipal bond ETF tracks the S&P National AMT-Free Municipal Bond Index, an investment-grade benchmark of municipal debt.

Compared to rival ETF issuers, namely iShares and State Street's SPDR brand, Vanguard's lineup of ETFs is small, but when the fund giant introduces ETFs, the funds usually become successful and do so in short order.

That is the case with VTEB. With $3.4 billion in assets under management, VTEB is the largest bond ETF that is less than three years old, according to Todd Rosenbluth, CFRA's director of ETF and mutual fund research.

Why It's Important

“As is common with fixed income ETFs, Vanguard uses sampling to provide diversification to liquid exposure to securities that are part of the 12,000 bonds in the index. According to Vanguard’s website, the ETF’s coupon of 4.75 percent was slightly above the benchmark’s 4.59 percent,” Rosenbluth said. 

VTEB holds nearly 4,300 municipal bonds and excludes housing and tobacco settlement bonds. The fund's duration is 5.7 years, qualifying VTEB as an intermediate-term holding. Investors typically favor shorter-dated debt as interest rates rise, but VTEB has managed to see inflows of $1.16 billion on a year-to-date basis.

As is par for the course with most Vanguard ETFs, VTEB is inexpensive. The ETF's annual fee of 0.09 percent makes it less expensive than 89 percent of competing strategies, according to issuer data.

What's Next

“CFRA thinks this portfolio-level analysis is more meaningful than reviewing an ETF’s longer-term track record. Such research enables CFRA clients to get to know ETFs before they hit their three-year anniversary,” Rosenbluth said. “In addition, VTEB trades approximately 400,000 shares daily with a tight penny bid-ask spread.”

CFRA rates VTEB Overweight, the research firm's highest rating for ETFs.

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