Jeff Johnson, head of fixed income product at Vanguard, told VettaFi that his team was seeing a growing interest in muni bonds among investors but noticed that for the most part, they “really only had at their disposal actively managed muni bond funds, mostly in mutual funds.” So, Vanguard now has the Vanguard Short-Term Tax-Exempt Bond ETF in its lineup of fixed income ETFs to address an increased investor need within the marketplace.
Launched on March 9, VTES tracks the S&P 0-7 Year AMT-Free Muni Bond Index and predominantly invests in short-term investment-grade municipal bonds. With an expense ratio of just 0.07%, it’s markedly cheaper than most active muni mutual funds.
According to Johnson, Vanguard launched this new short-duration muni fund 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,” he said.
Janel Jackson, Vanguard’s head of ETF capital markets, added: “We saw an opportunity for investors who have an interest rate preference that’s on the shorter end of the curve.”
VTES is Vanguard’s second municipal bond ETF after the Vanguard Tax-Exempt Bond ETF (VTEB ). Jackson explained that while VTEB’s duration is roughly five and a half years, the duration for VTES comes in at around two and a half years.
“We have a strong team in this space,” Jackson said. “So, I’m pretty happy there’s going to be another opportunity for them to provide a product for our investors to manage their portfolios and think about how short munis can play a role in their asset allocation.”
Growing Demand for (Indexed) Muni Funds
Johnson is seeing an increased appetite for muni ETFs — and indexed muni funds in particular. While roughly 55% of equity assets are indexed, and around 40% of fixed income assets are indexed, only 11% of muni assets are indexed, and most of that is in ETFs. This is one of the reasons why Vanguard launched VTES.
“We’ve seen growing demand for fixed income ETFs in general, but within fixed income, there’s been particular excitement and greater demand for munis,” Johnson said. “More and more investors who are getting comfortable with indexing in fixed income and who are gravitating towards ETFs are finding a need for this type of product in this space, which is really crucial for a lot of different types of investors who are looking to maximize tax efficiency.”
Harvesting Opportunities From a Down Year
Jackson noted that while last year was historically bad for bonds, “it did create a lot of opportunities for investors to harvest their losses,” a phenomenon for which Vanguard “saw a lot of that happening in the muni space.”
“We continue to see flows coming from higher-cost active products, specifically on the mutual fund side,” she said. “We saw a lot of inflows coming into ETF products. And this will be another option that investors have. That opportunity is still there if investors feel like this is the time to switch from a higher-cost mutual fund to a lower-cost ETF.”
Added Jackson: “Now you can get short-duration muni bonds that are packaged in a way that’s easily accessed, and at a price that’s pretty competitive at seven basis points.”
For more news, information, and analysis, visit the Fixed Income Channel.