Going by recent trends, about 200 new exchange-traded funds are launched in an average year. Vanguard, the second largest US ETF issuer after Blackrock’s iShares, however, remains conspicuously absent at most times despite managing $3.3 trillion in global assets.
Not any more after the Penn-based asset manager decided to break its long hiatus of more than two years with the launch of its first municipal bond index fund. That may sound a little strange since its competitors like iShares and State Street Global Advisors launched their muni-bond portfolios way back in 2009 and now offers a suite of products with billions in assets.
The newly-launched Vanguard Tax-exempt Bond Index Fund (VTEB) tracks the S&P National AMT-Free Municipal Bond Index, and is the asset manager’s first passive, index-tracking product. Vanguard has a suite of more than 15 active muni funds and its tax-exempt bond fund portfolio has nearly $120 billion in assets.
The underlying index of VTEB tracks investment grade US muni-bonds with a Fitch rating of BBB- and above and aims to give exposure to the national municipal bond market with maturities spread across the yield curve and an effective portfolio duration between five and eight years.
The portfolio debt includes bonds issued by states, agencies and local governments as the fund manager aims to reduce credit and liquidity risk by focusing on high quality municipal securities with greater liquidity. VTEB aims to match the interest rate risk of medium–to long-term bonds and seeks to closely follow the underlying index’s risk characteristics.
VTEB’s main competition would be the iShares National AMT-Free Muni Bond ETF (MUB), which tracks the same underlying S&P 500 National AMT-Free Municipal Bond Index and has accumulated more than $5 billion in assets. VTEB, however, charges only 0.12 % annually in fees, which is cheaper than 86 percent of competing muni-bond funds and is less than half of MUB’s 0.25% expense ratio. Obviously, Vanguard is trying to compensate late arrival with low fees.
Investors in the highest income bracket find muni-bond funds attractive since they are exempt from federal income taxes. For instance, MUB has a 30-day SEC yield of 1.74 percent, which works out at 3.07 percent on tax-equivalent basis for investors in the highest income bracket.
Disclosure: No holdings