Vanguard’s Short-Term Tax-Exempt Bond Fund Brings in Investor Capital

Less than two months after being launched, the Vanguard Short-Term Tax-Exempt Bond ETF (VTES) is seeing significant inflows. Data from VettaFi show that the nascent Vanguard fund brought in $70.8 million in inflows in April. That’s up a staggering 118% from the $25.27 million the ETF brought in during its first month of trading.

Vanguard launched VTES on March 9. VTES is Vanguard’s second municipal bond ETF after the Vanguard Tax-Exempt Bond ETF (VTEB). While VTEB’s duration is roughly 5.5 years, VTES’s duration is about 2.5 years. The fund had $143.7 million in assets as of April 30.

“Less than two months old, VTES has already gained a strong following,” said VettaFi’s head of research Todd Rosenbluth. “Investors are likely familiar with its older sibling, VTEB. But this fund appeals to those who want less interest rate sensitivity, while still earning consistent tax-free income.”

VTES seeks to track the S&P 0–7 Year National AMT-Free Municipal Bond Index. This benchmark tracks investment-grade U.S. municipal bonds with remaining maturities between one month and seven years.

See more: “VCIT Sees Most Inflows of All Corporate Bond ETFs

The fund is designed to balance the need for tax efficiency with the need for tax-exempt yield. This balance can translate to potentially higher yields than those afforded by competing strategies, for an appropriate level of duration risk.

Inside VTES, Vanguard’s Short-Term Tax Exempt Bond Fund

According to Vanguard, VTES provides investors “with a tool designed to optimize tax efficiency on the short end of the curve while maximizing potential yield overall.” And with an expense ratio of just seven basis points, VTES is markedly cheaper than most active muni mutual funds.

Vanguard’s head of fixed income product Jeff Johnson told VettaFi that VTES was launched to accommodate investors looking to generate tax-exempt yield in their portfolios while minimizing interest rate sensitivity.

“VTES is designed for tax-sensitive investors who have a preference for taking on less interest rate risk than the overall municipal market,” Johnson said.

In the same interview, Janel Jackson, Vanguard’s head of ETF capital markets, said: “We saw an opportunity for investors who have an interest rate preference that’s on the shorter end of the curve.”

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