By Andrew Welsch
Two Vanguard actively-managed municipal bond ETFs launched today with the company's characteristic low fees. They join a growing roster of active fixed income funds at the nation's second largest asset manager.
Vanguard's new muni ETFs, which were announced in August, are Vanguard Core Tax-Exempt Bond ETF (VCRM) and Vanguard Short Duration Tax-Exempt Bond ETF (VSDM). VCRM and VSDM each have expense ratios of 0.12%. That's below the average expense ratios for competing funds of 0.36% and 0.27%, respectively, according to Vanguard, which cited data from Lipper.
The funds are actively managed by Vanguard Fixed Income Group and are intended to offer investors exposure to municipal bonds across sectors, states, and credit quality with the potential to outperform their benchmarks over the long term, according to the company. High-income investors often use municipal bonds in their portfolios because of their tax advantages.
Jeff Johnson, head of fixed income product, says the new additions to Vanguard's fund lineup are intended to help round out investors' options in fixed income and offer them active and passive products in both ETF and mutual fund formats. Vanguard's fixed income business has more than $2.4 trillion globally in fixed income assets under management, spread across mutual funds and ETFs. But it's the latter category that has become the vehicle of choice for investors and financial advisors because ETFs are easy to trade and tax-efficient.
"Investors increasingly look to ETFs and we want to make sure that our lineup reflects that," he says. "A lot of that is testament to the strength of the team and having a lower expense ratio. That means you don't have to take on too many outsized risks to overcome the costs."
VCRM and VSDM are the company's fourth and fifth active ETFs on the fixed income side. And they are likely not the last fixed-income entries coming from Vanguard.
Salim Ramji, who became CEO of the Malvern, Pa.-based company in July, has set his sights on an ambitious growth agenda which includes expanding Vanguard's active funds, and in particular bond funds. His strategic focus builds on an area where Vanguard has already been making investments for some time. Indeed, Johnson notes the company's bona fides in munis goes back decades. "Muni bonds was one of the places Vanguard started offering active more than 40 years ago," he says.
The push into ETFs is more recent and showing some signs of success, at least as measured by asset flows. Two bond ETFs it launched last year -- Vanguard Core Bond ETF $(VCRB)$ and Vanguard Core-Plus Bond ETF (VPLS) -- have accumulated $1.2 billion and $274.8 million in assets under management, respectively. The Vanguard Ultra-Short Bond ETF (VUSB), launched in April 2021, has $4.6 billion.
Johnson says the company is evaluating whether there are additional funds it can bring to market. "That said, we tend to be conservative with regard to our product development," he says. "Every product we launch we make sure there is a real investment need and business case."
Most assets in ETFs are in equity funds. Just 20% of ETF assets are in fixed-income, per Vanguard. Active's share of the ETF market is growing, rising to 7% at the end of March from just 2% at the beginning of 2019, according to Morningstar.
Other asset managers are responding to some of the same signals, and launching more ETFs at a rapid clip: 328 ETFs have come to market this year, as of Sept. 30, according to Morningstar. That compares with 352 ETF launches in 2023. Of funds launched this year, 126 have been equity and 76 have been fixed income.
On the same day that Vanguard's new muni ETFs went live, Fidelity Investments said it was adding five actively managed equity ETFs to its burgeoning ETF lineup. The Boston-based company has 76 exchange-traded funds and products with $93 billion in assets under management. Earlier this month, Charles Schwab unveiled plans to launch its third active ETF, Schwab Core Bond ETF, early next year.
Many financial advisors and retail investors prefer active strategies in bonds because they believe a good active portfolio manager has an opportunity to outperform a benchmark, which is more difficult to do in the stock market. The bond market is large, complex, and there are many more securities to choose from. Investors have been shunning active strategies in large-cap equities, where portfolio managers have struggled to beat their indexes. Many large-cap funds have closed in the past decade.
Write to Andrew Welsch at andrew.welsch@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
November 21, 2024 16:16 ET (21:16 GMT)
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