The Vanguard Group has filled out a glaring gap in its fixed-income exchange traded fund investment suite, adding its first municipal bond ETF.
On Tuesday, Vanguard introduced the Vanguard Tax-Exempt Bond Index Fund (NYSEArca: VTEB).
“Vanguard is a pioneer in index investing and a leader in municipal bond fund management. Our new fund enables us to leverage our experience and expertise in both these areas,” Vanguard CEO Bill McNabb said in a press release. “Not only did we offer the first index mutual fund to individual investors, but we were also the first to offer investors a choice among municipal bond funds of differing maturities. We are pleased now to provide a low-cost tax-exempt option for investors who prefer an index approach.”
VTEB tries to reflect the performance of the Standard & Poor’s National AMT-Free Municipal Bond Index, which tracks investment-grade U.S. municipal bonds with at least a BBB- Fitch Rating and an effecitve duration between five and eight years. The underlying index includes debt issued by state, local governments or agencies.
“We believe a fund focused on high-quality municipal securities with greater liquidity relative to the overall municipal bond market will reduce credit and liquidity risk,” Chris Alwine, head of Vanguard Municipal Bond Group, said in the press release. “The fund will also benefit from our deep and long-tenured municipal market team, as well as our scale, to minimize trading costs and closely match the benchmark’s risk characteristics. At the same time, the fund will carry the interest rate risk consistent with medium- to long-term bonds.”
VTEB’s will be competing with the iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB), which has $5.2 billion in assets under management and also tracks the same underlying S&P National AMT-Free Municipal Bond Index. However, VTEB has a much cheaper 0.12% expense ratio, compared to MUB’s 0.25% expense ratio, which suggests that that Vanguard may be trying to compensate for the first-comer advantage with a lower fee to garner greater investment interest.
Municipal bond funds are attractive fixed-income investments because they are exempt from federal income taxes. Consequently, the muni ETFs provide enticing tax-exempt yields. For instance, MUB has a 1.74% 30-day SEC but offers a 3.07% tax equivalent 30-day SEC yield for those in the highest income bracket.
For more information on the munis market, visit our municipal bonds category.
Money managers who are looking into constructing their own ETFs may also be interested in attending the second annual ETF Boot Camp in New York next month. Whether you’re an ETF start-up, fund company, broker dealer, pension plan, endowment, private equity firm, fund board independent director, 401k plan provider or ETF industry executive…this conference is designed for you. This one-of-a-kind event will condense everything you need to know about the inner workings of the ETF business into two days.
Max Chen contributed to this article.