Reviewing the New Vanguard Tax-Exempt Bond Index Fund

A reader writes in, asking:

“I recently learned that Vanguard opened a muni bond index fund for the first time. What are your thoughts on it? Is it a better choice than the existing intermediate tax exempt fund? Is it worth switching?”

Overall, the new Vanguard Tax-Exempt Bond Index Fund appears to be very similar to the existing Vanguard Intermediate-Term Tax-Exempt Fund.

A few points of comparison:

• The expense ratios are the same (0.12% for Admiral Shares, 0.20% for Investor Shares).
• The minimum investment for Admiral Shares of the new index fund is $10,000, as compared to $50,000 for Admiral Shares of Vanguard Intermediate-Term Tax-Exempt Fund. However, the non-ETF version of the new index fund currently comes with a 0.25% purchase fee.
• The new index fund includes a much smaller number of bonds, which makes it appear somewhat less diversified. But this data is as of 10/31/15 when the fund was super new. I would expect this number to grow as the fund attracts more assets.
• The credit rating distribution within the funds is very similar.
• The new fund has slightly more interest rate risk, with an average duration of 5.7 years as opposed to 4.8 years for the non-index fund.
• And as you would expect for a fund with slightly higher risk, it has a slightly higher yield (1.86% as opposed to 1.71% for the non-index fund.)

In other words, the new fund looks like a great offering — very comparable to the existing Intermediate-Term Tax-Exempt Fund. But I do not see anything about the new fund that makes it distinctly better than the existing non-indexed fund. So I would definitely not think it’s necessarily worth switching, especially if doing so would incur undesirable tax consequences. (After all, by definition we’re talking about taxable accounts, otherwise tax-exempt funds wouldn’t be of interest in the first place.)

I think the new fund will be good for anybody who is simply more comfortable with indexed products than with actively managed products. (That said, the Intermediate-Term Tax-Exempt Fund, while technically not an index fund, is still a pretty passive fund with a relatively low degree of portfolio turnover.)

But I think the two most likely uses for the new fund will be:

• As a tax-loss harvesting partner for the existing fund, and
• As a low-commission option for people who invest via brokerage firms other than Vanguard (and who would be able to buy a Vanguard ETF at a lower commission than an open-end Vanguard mutual fund).