Vanguard Funds to Join the Muni-Bond Game

Vanguard is late to the game, but still looking for another win with its ace-in-the-hole: lower costs.

VanguardFour years ago, Vanguard gave the market a head-fake, first filing to launch three municipal bond index funds and ETFs in June 2010 only to withdraw the filing six months later in January 2011.

Today, Vanguard is back at it, with a filing for just one municipal bond index fund: Tax-Exempt Bond Index.

The fund (and its ETF share class) is expected to go live in the second quarter of 2015 and will seek to track the performance of the S&P National AMT-Free Municipal Bond Index. The index has an average maturity of 14 years or so and covers the investment-grade muni-bond market.

Within Vanguard’s stable, the new fund should look most similar to the actively managed Vanguard Long-Term Tax-Exempt Fund (VWLTX). Over the past decade, VWLTX returned 4.7% a year, just ahead of the 4.6% annual gain recorded by the S&P index. Risk essentially was the same as well, with both the active fund and the index experiencing drawdowns of 7.2% during the “taper-tantrum” of 2013. Keep in mind the index numbers do not include fees, making the performance of Vanguard’s managers all the more impressive.

The new fund’s most immediate competitor, however, will be the iShares National AMT-Free Muni Bond ETF (MUB), which tracks the same index and has over $4 billion in assets. The price war continues in the ETF space as Vanguard aims to come to market with an expense ratio half as much as the iShares ETF: 0.12% versus 0.25%.

Vanguard has proven that it doesn’t have to be the first to market to become the largest player. Vanguard wasn’t the first to the table in core taxable bonds or the emerging stock index space, but today Vanguard Total Bond Market ETF (BND) and Vanguard FTSE Emerging Markets ETF (VWO) are the largest ETFs in those spaces, surpassing iShares Core U.S. Aggregate Bond ETF (AGG) and iShares MSCI Emerging Markets ETF (EEM), as investors gravitated to the lowest fee option. Vanguard expects the lure of lower costs will work again.

Oh, and yes there’ll be regular, open-end fund options available for minimums of $3,000 (Investor class, 0.20% operating expenses) and $10,000 (Admiral class, 0.12%) but these funds also will be sold with a 0.5% front-end load. As a consequence, expect the bulk of the new index fund’s assets to be held in the ETF shares.

Editor/Research Director Jeffrey DeMaso helps publish The Independent Adviser for Vanguard Investors, a monthly newsletter that keeps abreast of recent developments at Vanguard, and the annual FFSA Indepedent Guide to the Vanguard Funds.

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