Tap Into Municipal Bonds With VTEB and VTES (When You Can)

While inflation appears to be slowing, it’s still well above the level that the Federal Reserve would like it to be. So, it’s likely that the U.S. central bank will continue to raise interest rates, which some believe will tip the U.S. economy into a recession. For investors in higher tax brackets concerned about recession risk, municipal bonds may be worth looking into.

Tax-equivalent yields on municipal bonds are approaching 7% for the first time in more than 10 years. Plus, munis are rated AA-, indicating a greater degree of safety from default risks than such lower-rated sectors as investment-grade credit.

“While recession forecasts entail risks for many markets, municipal balance sheets are flush with reserves following pandemic-era stimulus,” according to Vanguard. Plus, muni bonds should remain healthy even if a recession hits the U.S. later this year (which Vanguard believes is likely).

The Vanguard Tax-Exempt Bond ETF (VTEB) tracks the Standard & Poor’s National AMT-Free Municipal Bond Index, which measures the performance of the investment-grade segment of the U.S. municipal bond market. This index includes municipal bonds from issuers that are primarily state or local governments or agencies whose interests are exempt from U.S. federal income taxes and the federal alternative minimum tax (AMT).

VTEB carries an expense ratio of just 5 basis points.

Vanguard also plans to introduce another municipal bond index ETF, the Vanguard Short-Term Tax-Exempt Bond ETF (VTES), later this quarter. The ETF is intended for investors seeking to generate tax-exempt yield in their portfolios while minimizing interest rate sensitivity. It will predominantly invest in short-term investment-grade municipal bonds and will track the S&P 0-7 Year AMT-Free Muni Bond Index.

“Vanguard provides a broad yet carefully constructed lineup of investment options tailored to the needs of our diverse investor base with the goal of giving them the best chance for investment success,” said Daniel Reyes, head of the Vanguard portfolio review department, in a news release. “The new Short-Term Tax-Exempt Bond ETF has been thoughtfully constructed for tax-sensitive investors with a short time horizon and low risk tolerance, in complement to our broad range of municipal bond strategies.”

VTES will have an estimated expense ratio of 7 basis points.

For more news, information, and analysis, visit the Fixed Income Channel.