Maybe A Marvelous Muni ETF

Vanguard is the second-largest U.S. issuer of exchange-traded funds in terms of assets, but in terms of number of funds, Vanguard's lineup is small compared to rivals such as iShares and SPDR. Add to that, Vanguard does not bring many new products to market.

Recently, Vanguard introduced two new dividend ETFs, and given the company's track record, it could be a while before it brings another new ETF to market. The recipe works for Vanguard because when it does introduce a new ETF, chances are it becomes a success.

Vanguard Funds In The Spotlight

A prime example is the Vanguard Tax-Exempt Bond ETF (NYSE:VTEB). VTEB was Vanguard's lone ETF introduction of 2015 and somewhat quietly, the firm's first municipal bond ETF has become one of the most successful ETFs to come to market last year as it had nearly $251 million in assets under management as of the end of February.

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So it is not fair to say VTEB dwells in the ETF witness protection program, but it is not a stretch to say the fund should be garnering more attention. That is especially true when considering investors have been flocking to municipal bond ETFs this year.

It is also notable that VTEB is the first open-end index fund tracking municipal bonds to come to market.

Munis pose an additional set of challenges for would-be indexers. For starters, the muni-bond market is particularly diverse and fragmented, making the sampling process tough. The sheer volume of issuers alone can make replicating a specific segment of this space difficult. The $3.7 trillion muni market includes well over a million individual bonds outstanding that are offered by more than 50,000 unique entities, including many small and infrequent issuers, said Morningstar in a new research note.

VTEB has an average duration of 5.7 years. Duration measures a bond's sensitivity to changes in interest rates. Credit quality is not an issue with VTEB, as the ETF devotes over 91 percent of its weight to munis rated AAA or AA.

For muni investors, fund such as VTEB mitigate many of the perceived challenges of this market by sticking to larger, higher-quality, and more-liquid muni bonds. Those looking for exposure to the broad-based high-quality muni market would be well-served by considering these options. Reasonably priced, actively managed funds are a good option for investors looking for specific interest-rate risk or more credit risk, according to Morningstar.

As is usually the case with Vanguard ETFs, VTEB is inexpensive. The ETF charges just 0.12 percent per year, or $12 for each $10,000 invested, making it less expensive than 87 percent of rival funds.

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