“Two of our favorite index-tracking municipal-bond funds at the moment are Vanguard Tax-Exempt Bond ETF and iShares National Muni Bond ETF,” said Sotiroff. “The management teams at Vanguard and BlackRock both use a sampling approach to track the S&P National AMT-Free Municipal Bond Index.”
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The sampling approach means that both funds hold a subset of bonds within the index in order to replicate the yield, duration, and credit quality of the debt. This method allows the funds to avoid trading expensive bonds that could harm performance and in addition, minimize tracking errors.
“This approach has been effective so far as these two funds both delivered incredibly low tracking error over the past few years,” Sotiroff said.
With respect to an average net expense ratio of 0.32 percent in their category, both funds deliver very low costs–0.08 percent for VTEB and 0.07 percent for MUB.
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