Vanguard’s 2 New Muni ETFs Have an Advantage Over Mutual Funds

Who wants some beta?

Vanguard rounded out its municipal bond fund suite last week with a pair of passively managed tax-exempt funds: the Long-Term Tax-Exempt Bond and New York Tax-Exempt Bond ETFs. The strategies are new, not replicating existing mutual funds from the company’s extensive product line. There are, however, two active mutual funds in the same category, the Admiral shares of which charge 9 basis points — the same fee charged by the passive ETFs. But there is still a draw for index-level returns, or beta.

“Some clients just want the beta,” along with the low cost and ease of operation with an ETF, said Perryne Desai, senior fixed income product manager for the two new funds. “Now that bonds are actually yielding something and they are a safe harbor … there is no better time to be in fixed income. There’s no better time to be in munis.”

The Long and Winding Road

Vanguard has been building out its muni bond ETF line for two years, Jeff DeMaso, editor of The Independent Vanguard Adviser, said in a statement about the launch. With the additions, Vanguard has two dozen muni mutual funds and ETFs. The two new products “won’t turn heads but are practical additions to Vanguard’s roster,” DeMaso said. And they don’t necessarily offer a cost advantage over two existing active mutual funds, unless one takes into account the $50,000 minimum needed for Vanguard’s Admiral shares — the Investor shares, which have a $3,000 minimum, charge 17 basis points for the Long-Term and 14 for the New York version. “If you are willing to own a mutual fund (over an ETF), you can get Vanguard’s active management for free,” DeMaso said. “That’s a good deal in my book.”

Some of the details about the active funds:

• The Long-Term Tax-Exempt Fund, at $16.9 billion, has trailing returns of 0.26% over a year, 2.9% over three years, and 0.76% over five years, data from Morningstar show.
• The New York Long-Term Tax-Exempt Fund, at $5.1 billion, returned 0.28% over a year, 3.04% over three years, and 0.73% over five.

Better for the Beta: The new ETFs are managed by Vanguard’s fixed income group, whose track record in active management benefits the index team, Desai said, citing the example of the nearly 10-year-old Tax-Exempt Bond ETF, which has a beta of 0.97, according to Morningstar. “Our tracking error is pretty darn tight, and in municipals, that’s difficult to accomplish.”