Vanguard Will Deliver Early 2023 Treat for Advisors, Clients

For advisors and investors that are Vanguard fans, and data confirm there are plenty, Christmas might arrive early in 2023 as the index fund behemoth is planning to introduce its first exchange traded fund in 20 months early in the new year.

The asset manager is planning to launch the Vanguard Short-Term Tax-Exempt Bond ETF, which trade under the ticker “VTES,” during the first quarter. A specific launch date wasn’t mentioned in a press release. VTES could prove to be a well-time addition to what’s sure to be an expansive roster of rookie ETFs in 2023 not only because of branding, but also because some market observers believe municipal bonds could rebound following a turbulent 2022.

“"Vanguard provides a broad yet carefully constructed lineup of investment options tailored to the needs of our diverse investor base with the goal of giving them the best chance for investment success," said Daniel Reyes, head of Vanguard Portfolio Review Department, in the statement. "The new Short-Term Tax-Exempt Bond ETF has been thoughtfully constructed for tax-sensitive investors with a short time horizon and low risk tolerance, in complement to our broad range of municipal bond strategies."

As advisors know, Vanguard has a long-term track record of success with active municipal bond strategies and related index funds. The firm launched its first muni bond ETF in 2015 – the Vanguard Tax-Exempt Bond ETF (NASDAQ:VTEB) – and today it has $24.4 billion in assets under management.

VTES Details

Of course, advisors also know that Vanguard is a client favorite due in large part to the issuer’s reputation as a low-cost leader and VTES will keep with that tradition.

The aforementioned VTEB charges 0.05% per year, or $5 on a $10,000 position. That’s good for an advantage of 62 basis points over competing strategies. The upcoming VTES will be in comparable company.

“The ETF is intended for investors seeking to generate tax-exempt yield in their portfolios while minimizing interest rate sensitivity. It will predominantly invest in short-term investment grade municipal bonds and will track the S&P® 0-7 Year AMT-Free Muni Bond index. The ETF will have an estimated expense ratio of 0.07%, compared to 0.54% for the average short-term bond fund,” according to the statement.

Add to that, VTES will join impressive company and become part of Vanguard’s nearly $200 billion portfolio of municipal bond products.

“Vanguard's municipal bond team comprises 40 tenured portfolio managers, traders, and analysts that leverage their deep experience, scale, and sophisticated processes to navigate this complex segment of the fixed income market. Stephen McFee, a portfolio manager in Vanguard Fixed Income Group, will manage the new fund. Mr. McFee joined Vanguard in 2005 and currently manages multiple municipal bond funds, including Vanguard Tax-Exempt Bond Index Fund,” according to the issuer.

VTES: Right Place, Right Time?

Due to the Federal Reserve’s seven interest rate hikes, 2022 will go down as one of the worst years on record for the bond market. Munis weren’t spared.

That said, munis did outperform aggregate bond strategies and clients still need income and tax-advantaged investments, indicating Vanguard’s newest ETF could be at the right place at the right time when it debuts in the first quarter.

“For the first time in a long time, yields are attractive. At the beginning of the year, the yield on the Bloomberg Municipal Bond Index was close to 1%, near the lowest level in the history of the index. That’s no longer the case,” according to Charles Schwab research. “The yield on the index has risen to roughly 3.4%. While this isn’t as high as other fixed income options, municipal bonds are one of the few investment options that are often exempt from federal and potentially state income taxes if the issuer is located in your home state, so after adjusting for this, they are attractive relative to alternatives.”

Related: New ETF Marries Dividends, ESG