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Vanguard to Offer Its First Muni Bond Index Fund, ETF

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Vanguard has plans to offer a national municipal bond index fund with an exchange-traded fund share class. The investment management company filed a registration statement Tuesday with the Securities and Exchange Commission.

The new Vanguard Tax-Exempt Bond Index Fund will be the firm’s first tax-exempt index fund and ETF. It is expected to be available in the second quarter of 2015, according to a statement, and will offer three share classes: investor shares, admiral shares and ETF shares.

“For investors in high tax brackets, a high-quality, broadly diversified municipal bond fund or ETF can provide tax advantages as well as diversification from the risks of the equity market,” said Vanguard CEO Bill McNabb in a statement. “Vanguard is pleased to bring a low-cost index option to the municipal category as a complement to our lineup of low-cost actively managed tax-exempt bond funds.”

Vanguard Tax-Exempt Bond Index Fund’s target benchmark is the S&P National AMT-Free Municipal Bond Index. The fund, which will offer investors exposure to investment-grade municipal bonds across the entire yield curve, is intended to provide a sustainable level of current income that is exempt from federal personal income taxes, Vanguard says.

The investor, admiral and ETF Shares have estimated expense ratios of 0.20%, 0.12% and 0.12%, respectively.

Meanwhile, as of data from Dec. 31, 2013, the municipal bond funds in Lipper’s General and Insured Municipal Debt Funds category have an average expense ratio of 0.97%, and comparable ETFs in the category have an average expense ratio of 0.49%.

Investor shares will require a minimum initial investment of $3,000 and Admiral Shares will require a minimum initial investment of $10,000. These share classes will also include a 0.50% purchase fee to “defray portfolio transaction costs and enable the fund to more closely track its benchmark,” the firm stated.

Adam Ferguson, a portfolio manager in Vanguard Fixed Income Group, will manage the new fund.

Vanguard, which currently has about $140 billion in tax-exempt bond and money market funds, offered its first three tax-exempt bond funds (short-, intermediate-, and long-term) in 1977. It was the first mutual fund company to offer shareholders a choice among municipal bond funds of differing durations.

Today, Vanguard offers 12 actively managed municipal bond funds (five national, seven state-specific) and six tax-exempt money market funds (one national, five state-specific).

Vanguard is also one of the largest ETF providers, with $422.6 billion in assets. The firm offers 67 low-cost ETFs in the U.S., including 15 bond ETFs.

Fixed income ETFs have seemingly becoming a favorite among investors over the past year. And they are certainly driving ETF growth at BlackRock’s iShares, according to Mark Wiedman, Global Head of iShares at BlackRock.

“Fixed income was a key driver of flows globally, as investors of all kinds increasingly adopt ETFs as an essential instrument for accessing the bond markets,” Wiedman said in a statement. “iShares captured $40.3 billion globally, or 48% of all new flows, into fixed income ETFs.”

BlackRock announced on Monday that its iShares business led the global ETF industry flows by capturing $102.8 billion in new flows in 2014, or 31% of the record-breaking $330.7 billion global ETF market flows.

 

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