ETF Trends
ETF Trends

The new year is still young, but one of the more interesting news items to this point in 2015 from the exchange traded funds industry was Tuesday’s news that Vanguard will introduce its first municipal bond ETF.

The Vanguard Tax-Exempt Bond Index Fund will be the firm’s first tax-exempt index fund and ETF. Pennsylvania-based Vanguard already has a substantial municipal bond footprint with about $140 billion in tax-exempt bond and money market funds, according to a statement issued by the firm. The new ETF is expected to debut in the second quarter. [Vanguard to Introduce First Muni ETF]

“Vanguard continued to receive relatively strong inflows in ETFs in 2014, despite having a narrower lineup than peers. We believe Vanguard’s success stems from having well-diversified, low-cost and liquid products that can easily fit into an investors’ asset allocation strategy. We believe this week’s regulatory filing of a new municipal bond ETF, the first for the asset manager, will help spur continued demand for Vanguard’s offerings,” said S&P Capital IQ in a new research note.

Led by the Vanguard 500 Index (NYSEArca: VOO) and the Vanguard Total Bond Market ETF (NYSEArca: BND), Vanguard placed four funds among 2014’s top asset-gathering ETFs. Last year, investors poured a record $215.5 billion into Vanguard funds, including $75.3 billion into Vanguard ETFs. [ETFs Hit $2 Trillion Milestone]

However, Vanguard only issues 67 ETFs at the moment and none of its funds were among the just over 200 new ETFs that debuted in 2014.

“Vanguard has 67 ETFs, including various U.S. equity style and sector ETFs as well as 15 taxable bond ETFs. However, one of the gaps in Vanguard’s lineup has been offering investors a tax-free bond alternative,” said S&P Capital IQ.

Vanguard is entering another highly competitive ETF segment with its municipal bond offering. As S&P Capital IQ notes, there are currently 32 tax-free bond ETFs on the market today, including the $4.2 billion iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB) and notable rivals such as the $1.5 billion Market Vectors High Yield Municipal Index ETF (NYSEArca: HYD).

HYD and MUB are rated marketweight by S&P Capital IQ.

The new Vanguard muni ETF will track the S&P National AMT-Free Municipal Bond Index, which “focuses on investment-grade municipal bonds across the entire yield curve,” according to S&P Capital IQ.

Not surprisingly Vanguard’s new muni ETF will offer a cost advantage with fees of just 0.12% per year, well below the average annual fee of 0.49% on municipal bond ETFs, said Vanguard, citing Lipper data.

Tom Lydon’s clients own shares of HYD.