Lauded for their yield, credit quality, and of course, their federal tax-free income, municipal bond benefits are also extending into the containment of tariff contagion. A pair of funds that income investors should consider are the Vanguard Tax-Exempt Bond ETF (VTEB) and the Vanguard Core Tax-Exempt Bond ETF (VCRM).
As Vanguard noted, because munis derive their income from sources such as state income or property taxes, they are more insulated from the effect of tariffs, which have remained front and center in the 24-hour financial news cycle. Compare this to corporate bonds where certain companies could be affected by tariff levies on their products or even safe haven Treasuries where the rising cost of imported goods could keep inflation elevated and thus, apply downward price pressure while yields remain high.
“Municipal bonds also offer potential tax benefits, along with a domestic focus that largely shields them from tariff-related risks,” noted Vanguard in its most recent ETF industry perspective, noting that the income derived from munis are “insulated from the cause-and-effect concerns surrounding tariff policies.”
Yields Remain in Focus
In a macroeconomic environment where the market is looking ahead to potential rate cuts, munis offer an option that could rival corporate bonds with their higher credit quality. When you combine that with higher yields, it makes for a formidable option when juxtaposed with taxable, corporate bonds as well as Treasuries.
Vanguard’s industry perspective also offered a compelling comparison when looking at the tax-equivalent yields of munis compared with Treasury yields. The table below shows Treasury yields across varying maturities, which might look higher prima facie, but the story is different when considering the tax-free benefits of munis. Using a 40.8% tax bracket, the federal tax advantage of munis is readily apparent, as Treasuries would have to offer considerably higher yields to account for the tax advantage.
A Passive & Active Alternative
VTEB offers a simple, cost-effective alternative when looking for a broad-based muni option in the convenience and flexibility of an ETF wrapper. It has a paltry 0.03% expense ratio or $3 per $10,000 invested.
The fund tracks the Standard & Poor’s National AMT-Free Municipal Bond Index, offering investors exposure to bonds from state or local governments or agencies whose interests are exempt from U.S. federal income taxes, and the federal alternative minimum tax. Its 30-day SEC yield as of August 13 is 3.8%.
Active strategies continue to grow in popularity, making VCRM an ideal option to consider when looking for an active, muni-focused bond fund. When considering VCRM employs an active management strategy, its expense ratio is almost negligible — 0.12% or $12 per every $10,000 invested in the fund. The expense ratio is also well below the ETF Database category average of 0.35% and FactSet segment average of 0.30%. As of August 13, the 30-day SEC yield of 4.07% more than offsets the expense ratio.
VCRM offers investors an all-encompassing muni bond option like VTEB, but taps into the portfolio management capabilities of the Vanguard Fixed Income Group. For added flexibility during times of volatility or to capture upside in certain debt issues, the managers can adjust the holdings of the fund accordingly to suit the current market environment.
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