VTES: A unique approach to optimizing the short end of the yield curve
March 17, 2023
March 17, 2023
Tax-equivalent yields on municipal bonds are among levels not seen over the past decade.1 That's why the time may be right to consider this opportunity for your clients seeking a tax-efficient way to add to their fixed income allocation.
This is especially pertinent for your clients who wish to focus on bonds with shorter maturities. And when it comes to credit risk, municipal balance sheets are flush with reserves following pandemic-era stimulus. We believe they should remain healthy even if an economic downturn unfolds this year.
If you have clients looking to unlock solid yields over the near term as they wait out the stock market's roller coaster, consider our newest municipal bond ETF, Vanguard Short-Term Tax-Exempt Bond ETF (VTES). It provides your clients with a tool designed to optimize tax efficiency on the short end of the curve while maximizing potential yield overall. At a low-cost of 0.07%, VTES may also help you manage client portfolios more cost-effectively and efficiently.
VTES, which seeks to track the S&P 0–7 Year National AMT-Free Municipal Bond Index, is designed to balance the need for tax efficiency with the need for tax-exempt yield. This balance translates to potentially higher yields than those afforded by competing strategies, for an appropriate level of duration risk.
VTES may be particularly useful for your clients in higher tax brackets who seek income that is exempt from federal taxation. The ETF may be best suited for clients with either an investment horizon of two to four years, a higher sensitivity to changes in interest rates, or both.
Often, these types of investors have maximized their fixed income allocations in their tax-advantaged accounts and must allocate any additional fixed income positions in taxable accounts to meet their overall asset allocation goals. Municipal bond ETFs such as VTES and Vanguard Tax-Exempt Bond ETF (VTEB) can ease investor tax burden given the tax-exempt nature of their income and the tax-efficient nature of the ETF structure.
Like VTEB, VTES was also created in part to help with your portfolio construction needs if you want to move away from creating and managing labor-intensive bond ladders and separately managed accounts and toward using low-cost pooled products. ETFs such as VTES and VTEB can help you shift from acting as a portfolio manager to acting as a holistic financial planner.
VTES may also be used as a tax-advantaged vehicle for high-net-worth clients seeking to put cash to work.
Vanguard Fixed Income Group has managed tax-exempt actively managed funds for more than 35 years—a lengthy history that speaks to the group's abilities as prudent municipal bond managers.
VTES will be managed by the same municipal bond team that backs VTEB, our popular broad-based muni bond ETF. VTEB has grown to more than $25 billion in assets with a record of low-tracking error over its seven-year history.2
1 Bloomberg indexes, using yield-to-worst data as of January 31, 2023.
2 Vanguard Tax-Exempt Bond Index Fund, which is a multi-share class fund that includes Vanguard Tax-Exempt Bond Index Fund Admiral Shares (VTEAX) and VTEB had net assets of $26.6 billion as of December 31, 2022. VTEB had a 5-year tracking error of 0.09% as of December 31, 2022. See the fund’s profile page for more information.
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