Vanguard, a leading provider exchange-traded funds, has announced the launch of the Vanguard Tax-Exempt Bond ETF (VTEB). The ETF, which has been listed on the NYSE Arca, tracks the S&P National AMT-Free Municipal Bond Index.
Chris Alwine, Head of Vanguard’s Municipal Bond Group
The fund provides liquid exposure to a diversified range of investment-grade tax-exempt US municipal bonds, offering investors a moderate level of current income and a potential tool to enhance portfolio diversification.
Municipal bonds fall into two categories: general obligation bonds, those which raise funds to cover immediate expenses and rely on the taxing power of the municipality to service the debt; and revenue bonds, those which raise funds specifically designated for a project and rely on the revenue from the completed venture to repay the loan.
The constituents of the ETF target a weighted effective duration between five and eight years, while diversifying duration risk by holding bonds with maturities across the yield curve.
“We believe a fund focused on high-quality municipal securities with greater liquidity relative to the overall municipal bond market will reduce credit and liquidity risk. The fund will also benefit from our deep and long-tenured municipal market team, as well as our scale, to minimize trading costs and closely match the benchmark’s risk characteristics. At the same time, the fund will carry the interest rate risk consistent with medium- to long-term bonds,” said Chris Alwine, head of Vanguard’s Municipal Bond Group.
ETFs tracking US municipal bonds may provide a suitable option for investors looking to place relatively conservative assets within their portfolios. Most investors are tax-exempt regarding interest payments on these bonds and, given the consistent moderate growth of the US economy in recent years, credit risk related to both general obligation bonds and revenue bonds are relatively low.
Interest rate risk may be of concern to some investors given the longer nature of the duration of the fund; however, market expectation of an interest rate increase has fallen lately on the back of slower global growth and market volatility stemming from China.
The fund has a total expense ratio of 0.12%.