The forthcoming presidential election is certainly adding a healthy dose of intrigue into the municipal bond space. That said, Vanguard has a pair of muni ETF options that are worthy of consideration.
A CNBC report highlighted the benefits and pitfalls of the muni space with the election fast approaching. Depending on the policy agendas of the presidential candidates, munis could see strong upside.
To that note, investors looking for muni exposure can opt for passive options from Vanguard. The issuer has a broad-based option with the Vanguard Tax-Exempt Bond ETF (VTEB ) and a short-term maturity date option with the Vanguard Short-Term Tax-Exempt Bond ETF (VTES ).
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. Overall, this index includes municipal bonds from issuers, primarily state or local governments or agencies whose interests are exempt from U.S. federal income taxes, and the federal alternative minimum tax.
To mitigate rate risk in municipal bonds, VTES is an ideal option. The fund tracks the S&P 0-7 Year National AMT-Free Municipal Bond Index. That index 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.
An election year could also mean forthcoming volatility for the broader bond market. Again, presidential policy strategies can affect various corners of the bond market. This opens up opportunities for investors to also get bond exposure via active management.
The Active Advantage
The municipal bond market in particular has its own nuances. Investors may be intrigued by an actively managed fund. Given the experience of the portfolio managers for these funds, they are privy to the intricacies of the muni bond market.
“You may say, look I’m going to create my own index or use the complete Bloomberg index, and I think it’s going to be near impossible to buy the vast majority of those securities,” said Scott Diamond, co-head of the municipal bond team at Goldman Sachs Asset Management. “A school district may issue a general obligation bond once, and it’s going to take them a long time before they need to come back to the market again. And yet your debt might have ended up in an index. How do you replicate that in a portfolio?”
For a broader bond market approach to active management, consider the Vanguard Core Bond ETF (VCRB ). To mitigate credit risk, the fund focuses on the U.S. investment-grade bond market. In addition to U.S. Treasurys, the ETF adds exposure to other fixed income assets for diversification, which includes mortgage-backed and corporate securities. That can also add more yield as opposed to sticking with safe haven government debt.
For more news, information, and analysis, visit the Fixed Income Channel.
