Vanguard Debuts Pair of Muni Bond Funds

Vanguard, the asset management giant with $2.4 trillion in 84 ETFs, has unveiled two municipal bond ETFs this week, tapping into investor demand for low risk, low-cost investments.

The Vanguard Intermediate-Term Tax Exempt Bond ETF (VTEI) and the Vanguard California Tax-Exempt Bond ETF (VTEC) are both passively managed funds with an intermediate time horizon, according to the firm’s press release. The California Tax-Exempt Bond ETF is specifically for investors who live in California and have an intermediate to long-term investment horizon. The ETFs launched on Jan. 30th.

Both passive funds have an expense ratio of 0.08%, which is notably lower than competing fixed income ETFs—many of which are actively managed. The average expense ratio for fixed income ETFs is 0.35%, according to etf.com data.

“Muni bonds are benefiting from the same factors as the broader bond market—an easing of inflationary pressures and expectations that the Fed will begin cutting rates in the coming months,” explained etf.com analyst Sumit Roy. “For investors in high tax brackets, munis often offer higher after-tax yields than their Treasury counterparts in exchange for slightly higher credit risk,” he added.

Unlike some other kinds of fixed income products, municipal bonds are so called “tax-free” because they are exempt from federal taxes. However, many muni bonds are still subject to state or local taxes. Muni bonds historically have had low default rates, which makes them a relatively low-risk investment.

“The continued expansion of our tax-exempt bond ETF lineup brings advisors and individual investors new ways to access the municipal market with a low-cost and diversified portfolio,” said Sara Devereux, global head of Vanguard Fixed Income Group in a statement.

Easing Inflation Drives Investors to Bonds

In anticipation offor more rate cuts from the Fed, many investors are moving out of cash and into both equities and bonds.

Tony Kelly, co-founder of BondBloxx, projected on etf.com’s flagship podcast that fixed income ETFs will jump from 20% of the ETF market to 40% by 2030.

Vanguard boasts the largest fixed income fund in the industry, the Vanguard Total Bond Market ETF (BND), which has $104.64 billion in assets. In January of this year, inflows to the fund reached has seen $1.4 billion in inflows.

Contact Lucy Brewster at [email protected].