Vanguard to launch short-term municipal bond ETF

Jan 4th, 2023 | By | Category: Fixed Income

Vanguard has unveiled plans to introduce a new fixed income ETF targeting tax-exempt securities at the front end of the yield curve.

Vanguard to launch short-term municipal bond ETF

Vanguard already offers one of the lowest-cost tax-exempt bond ETFs available in the US.

According to the Pennsylvania-headquartered provider of low-cost investment funds, the Vanguard Short-Term Tax-Exempt Bond ETF (VTES US) is due to be rolled out by the end of Q1 2023.

Managed by the Vanguard Fixed Income Group, VTES is intended for investors seeking to generate tax-exempt yield in their portfolios while minimizing interest rate sensitivity.

Daniel Reyes, Head of Vanguard’s Portfolio Review Department, said: “Vanguard provides a broad yet carefully constructed line-up of investment options tailored to the needs of our diverse investor base with the goal of giving them the best chance for investment success.

“The new Vanguard 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.”

The fund will track the S&P 0-7 Year AMT-Free Muni Bond Index which consists of investment-grade, fixed-rate US municipal bonds with maturities between one month and seven years. Eligible bonds must be denominated in US dollars and have a minimum par amount outstanding of $25 million.

The ETF is expected to have an expense ratio of 0.07% compared to 0.54% for the average short-term bond fund, according to data from Lipper.

VTES’s price tag will match that of the $11.0 billion iShares Short-Term National Muni Bond ETF (SUB US) which tracks an index consisting of municipal bonds with remaining maturities between one month and five years.

While Vanguard’s municipal line-up houses some $200bn in assets, the firm offers just one other muni bond ETF – the $20.8bn Vanguard Tax-Exempt Bond ETF (VTEB US).

Launched in August 2015, VTEB has become a notable challenger to the more seasoned iShares National Muni Bond ETF (MUB US) which is the largest muni bond ETF on the market with $31.8bn current assets under management. Both ETFs deliver broad exposure to the investment-grade, fixed-rate municipal bond market; however, VTEB’s expense ratio of 0.05% is two basis points cheaper than the 0.07% charged by MUB.

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