Fixed income

Municipal bonds

For clients looking for tax-exempt income.

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Overview

Why municipal bonds?

Municipal bonds help finance federal, state, and local projects. For high-net worth clients, tax‑free income can translate into higher after‑tax returns than taxable bonds, even when headline yields look lower.

Like most bond investments, municipal bonds can generate income and enduring real returns while providing a ballast to equity risk. What makes them special is their tax-exempt income, fixed income diversification, and high average credit quality.

 

How Vanguard’s municipal bond funds work


Individual municipal bonds are illiquid and difficult to trade individually. Municipal bond ETFs and mutual funds, on the other hand, offer an easier way to obtain the same benefits combined with diverse, liquid exposure.

Vanguard municipal bond funds and ETFs aim to deliver:

  • Tax-exempt income across various national and state funds and ETFs.
  • Outperformance through various alpha sources, including credit, structure, and duration positioning.
  • Top-quartile returns over the long term alongside lower volatility, with a rigorous risk management process.
  • Greater retention and growth of wealth through low fees, averaging in the lowest 5% of the funds’ respective peer groups.

key differentiators

Key differentiators:

One of the largest fully dedicated and experienced municipal investment teams in the industry.

In a market with close to 50,000 issuers, we can find and deliver value in both our active and index strategies.

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Our focus on coupon and call structures.

We aim to add additional alpha by managing prepayment and extension risks. Rising yields can lead to rising durations in callable securities. Once yields are higher than a callable muni bond’s coupon level, prices fall further due to tax effects if sold in the secondary at a discount.

Discounted muni bonds can offer value when properly evaluated on an after-tax basis. Identifying corresponding risks and opportunities requires both the efficiency of advanced quantitative modeling and deep expertise in these markets.


Vanguard’s lineup

Vanguard’s municipal bond offerings

Municipal bond investors have two primary goals: Tax-free income and capital preservation. They also seek to enhance total return, as long as it doesn’t compromise tax efficiency or portfolio stability. Vanguard's comprehensive municipal bond ETF lineup allows advisors to customize their clients’ exposure to meet their various objectives.

Tax advantages

Tax efficiency drives yield potential

Vanguard ETFs are designed to maximize tax efficiency and increase yield potential for their target risk or state exposure.

The tax savings clients get from municipal bonds makes them very competitive with other types of bonds. Look at the tax-equivalent yield that a taxable account would need to have to match U.S. municipal bond yield.

 

 

Tax-equivalent yields

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Notes: The municipal tax-equivalent yield is calculated using a 40.8% tax bracket, which includes a 37.0% top federal marginal income tax rate and a 3.8% Net Investment Income Tax to fund Medicare. Municipal bonds are represented by the Bloomberg U.S. Municipal Bond Index; U.S. aggregate bonds by the Bloomberg U.S. Aggregate Index; U.S. Treasury bonds by the Bloomberg U.S. Treasury Index; U.S. mortgage-backed securities, by the Bloomberg U.S. MBS Index; and U.S. corporate bonds by the Bloomberg U.S. Corporate Bond Index

Sources: Vanguard and Factset, using Bloomberg indexes data, as of March 31, 2025. 

Past performance is not a guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. 

use cases

Municipal bond use cases

Here are our best ideas for using Vanguard municipal bond funds and ETFs in client portfolios:

 

Tax-optimize investing

  • Efficiently allocate taxable assets without juggling labor-intensive bond ladders.
  • Use in taxable portfolios when options in tax-sheltered vehicles have been exhausted.

Use municipal debt to diversify fixed income

  • Unique attributes (like carrying yearly issuance amounts and differing degrees of issuer taxing abilities) result in a differentiated risk-and-return profile.

Diversified exposure

  • Use muni ETFs to gain immediate, diversified exposure in both small- and large-scale amounts more affordably and efficiently than is possible with individual bonds.

Get ETF liquidity with an asset class that lacks it

  • Muni ETFs can potentially add more liquidity through ETFs structure relative to mutual funds or individual bonds.
  • A strong secondary market for ETF trading can reduce transaction costs relative to the underlying municipal bond market.

Portfolio analytics

Create and evaluate the fixed income portion of client portfolios. Analyze hypothetical performance risk statistics, country diversification, and asset allocation; compare two portfolios side-by-side; and more.

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Resources

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Disclosures and footnotes
  • For more information about Vanguard funds and Vanguard ETFs, visit advisors.vanguard.com to obtain a prospectus or, if available, a summary prospectus. 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 possible loss of principal. 
  • Diversification does not ensure a profit or protect against a loss.
  • Bond funds are subject to interest rate risk, which is the chance bond prices overall will decline because of rising interest rates, and credit risk, which is the chance a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer's ability to make such payments will cause the price of that bond to decline.
  • Municipal bond fund distributions, including any market discount recognized by the Fund's investments, may be taxable as ordinary income or capital gains. A majority of the income dividends that you receive from the Fund are expected to be exempt from federal income taxes. However, a portion of the Fund’s distributions may be subject to federal, state, or local income taxes or the federal alternative minimum tax. You should consult your own tax advisor with respect to any particular U.S. or non-U.S. tax consequences of your investment in the Fund.