If you’re looking for low-cost access to tax-free income, Vanguard tax-exempt bond funds are a smart place to begin your search.
The income from municipal bonds and from mutual funds that hold municipal bonds is free of federal tax and, if you live within the state of the issuing municipality, the income can be free of state income tax as well. And since taxes can take a big bite out of yields from bonds, tax-exempt bond funds from Vanguard Funds can be smart holdings in taxable accounts.
Before buying tax-exempt bond funds, investors should compare yields to taxable bond funds. This is because, in general, municipal bonds provide lower yields than taxable bonds. Therefore the investors that benefit the most from tax-free income are those that are in higher income tax brackets.
With that said, here is a list of Vanguard tax-exempt bond funds, along with key information on each.
Vanguard Tax-Exempt Bond Funds
Vanguard California Intermediate-Term Tax-Exempt (MUTF:VCAIX): Investors looking for tax-free income and moderate interest rate risk will like VCAIX. This fund invests in high-quality California municipal bonds of various maturities that average five to six years in duration. The current yield is 1.96%, which is decent for California investors in higher tax brackets that can avoid income tax at the state and federal level. The expense ratio for VCAIX is 0.2%, or $20 for every $10,000 invested.
Vanguard California Long-Term Tax-Exempt (MUTF:VCITX): Vanguard’s VCITX holds California municipal bonds with durations from six to 10 years. Being a long-term bond fund, VCITX will average higher yields but investors should be aware that longer maturities mean greater interest rate risk. The current yield is 2.5% and expenses are 0.2%.
Vanguard High-Yield Tax-Exempt (MUTF:VWAHX): This fund seeks to provide shareholders higher yields through lower-credit-quality municipal bonds that average long-term maturity. This means market risk is higher, but the yields can be worth it, especially for investors holding VWAHX in a taxable account. The fund doesn’t focus on just one state, which broadens its appeal to investors around the country and enables the fund manager to find the best yields, regardless of issuing state. The current yield is 3.3% and the expense ratio is 0.19%.
Vanguard Intermediate-Term Tax-Exempt (MUTF:VWITX): Investors looking for a diverse mix of municipal bonds for their taxable account may want to consider VWITX. In a rising interest rate environment, intermediate-term bonds tend to see less price declines than the higher-risk, longer-term bonds. This makes VWITX a smart choice for a broader range of investor looking for tax-free income at the federal level. The current yield for VWITX is 2.1% and the expense ratio is 0.19%.
Vanguard Limited-Term Tax-Exempt (MUTF:VMLTX): VMLTX is the answer among Vanguard tax-exempt bond funds to invest in short-term municipal bonds, but without focusing on one state. This offers investors lower interest-rate risk and broader diversity. The average duration of the bond holdings is about two years, which is slightly longer than average short-term bond funds. The current yield for VMLTX is 1.4% and the expense ratio is 0.19%.
Vanguard Short-Term Tax-Exempt (MUTF:VWSTX): Investors looking for yields higher than money market funds, plus tax-free income at the federal level, should take a closer look at VWSTX. The fund holds municipal bonds with durations averaging one to two years, which a bit shorter than VMLTX. The current yield for VWSTX is 0.94% and the expense ratio is 0.19%.