VTES: A unique approach to optimizing the short end of the yield curve

Conceptual image of geometric pebbles A stack of red pebbles on a red background

VTES: A unique approach to optimizing the short end of the yield curve

Product News


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.

Introducing Vanguard Short-Term Tax-Exempt Bond ETF

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.

Optimize tax-efficiency while maximizing yield potential within the short end of the yield curve

duration risk chart

Useful for the tax-aware

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.

Build a better, tax-efficient portfolio

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.

hypothetical bond portfolio chart

Leverage our long history and expertise managing municipal bond products

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

Find out more about VTES


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.



  • For more information about Vanguard funds or Vanguard ETFs, obtain a prospectus (or a summary prospectus, if available) or call 800-997-2798 to request one. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.
  • Vanguard ETF Shares are not redeemable with the issuing fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.
  • All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.
  • Investments in bonds are subject to interest rate, credit, and inflation risk.
  • Although the income from a municipal bond fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund's trading or through your own redemption of shares. For some investors, a portion of the fund's income may be subject to state and local taxes, as well as to the federal Alternative Minimum Tax.

This article is listed under

Some alt text

Save articles

Save articles to your profile using the bookmark icon.