Vanguard reads the room then launches new long and short duration active muni ETFs
The short and longer-term products out of Malvern, PA. are part of a longer arc and 'fixed income is sort of the final frontier,' Morningstar analyst opined
4 min read- Vanguard launches two active municipal bond ETFs (VCRM, VSDM) amid renewed bond interest.
- ETFs offer diversified, low-cost exposure to municipal bonds, targeting long-term investor outcomes.
- Demand for municipal ETFs is growing, driven by advisor adoption and tactical portfolio management.
Brooke's Note: Stock-and-bond portfolios are making a comeback because, lo and behold, bonds are making a comeback, even municipal bonds. Stocks never went away. Bonds, sort of, did. We even had to endure arguments that alternative investments were – by default – soon to be the hedging half of the 60-40 portfolio. Bonds are positioned, again, to be a primary source of income in portfolios, with a fighting chance of providing capital gains, too. With all that as backdrop, Vanguard is making it a priority to get bond funds out there – in this case cheap, active ETFs that never existed before and that are designed with modern advisor portfolio management objectives.
Muni bonds, an old thing, have become a new thing, again, after languishing in a zero-rate environment, and Vanguard Group is charging into the category.
The Malvern, Pa., manager said it will launch two more active municipal bond ETFs by the end of 2024, reflecting what it expects to happen tomorrow – both with rates and within the whole municipal bond category.
The plans, announced today (Aug. 16) include the Vanguard Core Tax-Exempt Bond ETF (VCRM) and Vanguard Short Duration Tax-Exempt Bond ETF (VSDM).
Bonds got clobbered when interest rates skyrocketed, but if rates reverse course (the Fed is expected to drop them next month), the potential exists for capital gains as well as steady income.
“I think when you look at just what’s happened, we’ve been in the zero-interest-rate environment for 10- or 12-years," said Daniel Sotiroff, senior Morningstar analyst in a Feb. interview.
With key tweaks, Charles Schwab is introducing its first ultra-short bond product in 13 years; last time it paid dearly to settle an SEC complaint over similar product, YieldPlus
"We’re finally coming out of that over the last two or three years. So, there are actually some interest rates attached to these things.
“If you’re looking to innovate, I think fixed income is sort of the final frontier at this point,” he said.
Charles Schwab just launched its own short-duration ETF. See: With key tweaks, Charles Schwab is introducing its first ultra-short bond product in 13 years; last time it paid dearly to settle an SEC complaint over similar product, YieldPlus
Investor shift
Dan Reyes, head of Vanguard Portfolio Review Department emphasized long-term in the release.
Story Timeline
Vanguard Muni ETFs by the Numbers Vanguard Core Tax-Exempt Bond ETF and Vanguard Short Duration Tax-Exempt Bond ETF will offer diversified exposure to municipal bonds across sectors, states and credit quality, according to the company. The Core Tax-Exempt Bond ETF will offer all-curve exposure to primarily high-quality, investment-grade municipal bonds that offer tax-exempt income. Investors in the short duration ETF can expect a portfolio of short-duration and primarily high-quality, investment-grade municipal bonds that generate tax-exempt income with lower interest rate sensitivity. Both bond ETFs will be priced at 0.12% compared with the average expense ratio for competing funds of 0.37%, or 0.24%, respectively, as of June 30. |
“[The launches] underscore the firm’s ongoing efforts to improve long-term investor outcomes by offering broadly diversified, low-cost municipal bond exposures with the potential to outperform the market over time.”
Still, Vanguard's interest in launching products made up of municipal bonds is even more nuanced, said Justin Schwartz, head of municipal index and money markets at Vanguard.
“There has been substantial demand for municipal ETFs in recent years. We’ve seen similar shifts toward ETFs in the equity and taxable bond markets.
"Now, munis are following suit,” he said in a March 2024 interview.
The municipal investor base has shifted from a reliance on buy-and-hold retail investors to a more dominant part of model portfolios, he added.
Advisors are getting more tactical with asset allocation shifts as well as capitalizing on tax-loss harvesting opportunities.
“That means there is now a greater base of investors who can benefit from the liquid ETF vehicle to build municipal portfolios that are also low cost and broadly diversified,” he said.
“Access to the bond market, in general, and to municipals, in particular, has been democratized. We’re diversifying our product offerings to meet that demand.”
Rely on RIABiz? Tell Google.
Naming us a preferred source puts our reporting first in your Top Stories and AI Overviews. Takes one click, and only you see the difference.