Tax-equivalent yields on municipal bonds are at higher levels than seen in years. Plus, thanks to pandemic-era stimulus funding, most muni balance sheets are flush with cash. So, even if a recession hits the U.S. this year, odds are that munis should remain healthy. Investors seeking a tax-efficient way to increase their fixed income allocation should consider the Vanguard Short-Term Tax Exempt Bond ETF (VTES).
The fund invests in investment-grade muni bonds with maturities between zero and seven years. It seeks to track the S&P 0–7 Year National AMT-Free Municipal Bond Index.
See more: “Treasuries Offering Yields Not Seen in Over a Decade”
Optimizing Tax Efficiency While Maximizing Potential Yield
VTES provides a tool to optimize tax efficiency on the short end of the curve while maximizing potential yield overall. The fund aims to balance the need for tax efficiency with the need for tax-exempt yield.
“VTES may be particularly useful for your clients in higher tax brackets who seek income that is exempt from federal taxation,” according to Vanguard. “VTES may be best suited for clients with an investment horizon of 2-4 years, a higher sensitivity to interest rate changes, or both.”
The fund carries an expense ratio of 7 basis points.
Jeff Johnson, head of fixed income product at Vanguard, told VettaFi that Vanguard designed VTES “for tax-sensitive investors who have a preference for taking on less interest rate risk than the overall municipal market.”
“We saw an opportunity for investors who have an interest rate preference on the shorter end of the curve,” said Vanguard’s head of ETF capital markets Janet Jackson.
For more news, information, and analysis, visit the Fixed Income Channel.