Vanguard Group is set to offer its maiden passive muni-bond exchange-traded fund focused on the $3.6 trillion U.S. municipal-bond market.
The low-cost provider’s proposed ETF once again pits it against more established rivals’ funds.
Vanguard muni-bond ETF opens new ETF-fee war
In its regulatory filing with the U.S. Securities and Exchange Commission Tuesday, Pennsylvania-based Vanguard disclosed it is looking to add a passively managed broad-based municipal bond fund to its portfolio. The Vanguard Tax-Exempt Bond Index Fund and its ETF share class will track the S&P National AMT-Free Municipal Bond Index.
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The new launch will lower the already-low price floor in the ETF space. Vanguard’s ETF will cost 0.12%, or $12 per $10,000 invested, while the market leader BlackRock’s $4.2 billion iShares National AMT-Free Muni Bond ETF charges 0.25%. It is worth noting that both ETFs will track the same S&P National AMT-Free Municipal Bond Index.
While American Funds’ $9.7 billion Tax Exempt Bond Fund of America charges 0.56%, the $7.5 billion Invesco High Yield Municipal Fund costs $0.87%. Interestingly, Morningstar data reveals that these funds have yielded superior returns compared to the passive iShares National AMT-Free Muni Bond ETF over the past five years.
Chris Dieterich of Barrons points out that prices matter to long-term ETF investors, who tend to be a cost-conscious lot in the first place.
$3.6 trillion muni-bond market
Vanguard’s proposed ETF offering will focus on the $3.6 trillion U.S. municipal-bond market.
Brian Chappatta of Bloomberg notes the appeal of tax-exempt interest on munis has grown for high earners, who last year faced the highest top tax bracket since 2000. The top federal rate stands at 43.4%, when one considers a 3.8% tax on the investment income of top earners resulting from the 2010 Patient Protection and Affordable Care Act.
In a statement, Vanguard CEO Bill McNabb said: “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”.
Vanguard already offers 12 actively managed muni bond funds that have about $140 billion in assets under management, but no indexed funds. In a press release, Vanguard noted that Lipper says the average fee for muni funds in the traditional bond space is 0.97%, and 0.49% for ETFs.
Considering Vanguard’s stunning success in the ETF space, besides its devoted following among investors, investor dollars will likely be quick to follow the proposed fund’s launch.
As noted by ValueWalk, in August last year, indexing’s rising popularity and challenges of active management were discussed during Vanguard’s Investment Commentary podcast. Moreover, there has been growing acceptance of indexing from financial advisers in terms of building out their clients’ portfolios.