Municipal bond exchange traded funds are enduring the multiple interest rate hikes set forth by the Federal Reserve this year. For example, the Vanguard Tax-Exempt Bond Fund ETF (NYSEARCA: VTEB) is higher by 2.6% year-to-date.
Munis also help diversify fixed-income portfolios. Investors who typically follow the Barclays U.S. Aggregate Bond Index will not have municipal bond exposure, so a muni bond ETF can complement core fixed-income positions.
Municipal bonds continue to experienced robust demand from U.S. investors as reliable source of yield, especially among taxable accounts due to the debt securities’ favorable tax-exempt status. Recently, Japanese investors have gobbled up U.S. munis as a way of generating income as Japan maintains negative interest rates.
VTEB “debuted less than two years ago, meaning this is one of the newest Vanguard bond ETFs. VTEB is Vanguard’s first foray into municipal bond ETFs, though the firm already had a major footprint in the world of municipal bond index and actively managed funds,” according to InvestorPlace.
Looking ahead, the muni market is entering a reinvestment season that could bolster the market, with three consecutive months of significant reinvestment demand generated by coupons, maturities and calls ahead.
Many muni investors feared that President Donald Trump’s big plans for an infrastructure revival would inundate the market with a new supply of municipal debt issuance.
Many were also concerned that Trump’s plans to lower income taxes would weaken the appeal of tax-exempt munis and that the president’s pro-growth agenda would push the Federal Reserve to hike interest rates sooner and faster.
“As is the case with so many Vanguard ETFs, VTEB has garnered a loyal following among investors since coming to market. Assets under management of $1.2 billion confirm as much. This Vanguard bond ETF also features a massive lineup with almost 3,170 issues, 93% of which are rated AAA, AA or A,” reports InvestorPlace. “VTEB’s average duration is 5.8 years, which is not as risky as long-term bond ETFs. Longer-term risks for this Vanguard bond ETF and other municipal bond funds include potential changes to the U.S. tax code that could reduce the tax benefits of munis and deteriorating municipal balance sheets in states that are major issuers of these bonds, such as California and Illinois.”
Year-to-date, investors have allocated $603.5 million to VTEB.
For more information on the munis market, visit our municipal bonds category.