“Show me the munis” has been a common refrain in the fixed income markets as of late. With municipal bond issuance continuing to reach elevated levels, here’s an active option investors need to know about: the Vanguard Core Tax-Exempt Bond ETF (VCRM).
The fund shines through as a prime option worthy of consideration among the vast alternatives present in the muni market. With their rare combination of credit quality and yield, munis are offering fixed income investors prime benefits in a still-uncertain bond environment.
The byproduct of higher demand, of course, is increased supply. Muni issuers have been quick to douse investors with a heavy downpour of new bond issuance.
“It’s been raining bonds for weeks,” said Brian Barney, who oversees bond portfolios at Parametric Portfolio Associates.
As Barron’s noted, 2024 saw record issuance with $500 billion. Halfway through this year, forecasts are already pitting 2025 to see another year of record issuance at $560 billion. Early June witnessed issuance of $20 billion in just a week.
Price appreciation isn’t one of the current benefits of munis. As mentioned, yields continue to be the prime catalyst for investor demand as muni prices have had their bout of volatility. This was certainly the scenario in April, but things are starting to level off.
“Munis have stabilized but have not bounced back as much as other financial assets from post–Liberation Day volatility,” said John Miller, head of municipal credit at First Eagle. “We’ve seen munis become more stable, but at a cheaper overall yield level.”
The obvious appeal of munis is the tax-exempt income they offer. With new issuance continuing to flood the market, investors may more options than ever to choose from. The same can be said with ETFs where investors can also choose their level of exposure: passive or active.
An Inexpensive Active ETF
“Inexpensive” and “active ETF” used to be terms that never resided in the same sentence. Detractors of active ETFs typically cited the higher cost of these funds compared to their passive peers. Why pay portfolio managers when an index can easily slot into their place? With 12 basis points for VCRM, the argument becomes null and void. Those still not convinced can look at how VCRM stacks up versus the category average.
The fund leverages the experience of the Vanguard Fixed Income Group, which is crucial in the municipal bond market. Munis carry their own specific nuances that require niche expertise in this particular derivation of the bond market. Under the auspices of Vanguard’s portfolio management capabilities, investors can have peace of mind knowing their money is being allocated properly.
“Vanguard has tremendous active management expertise to leverage and support ETF investors,” said Todd Rosenbluth, head of research at VettaFi. “Demand for fixed income ETFs has never been stronger, but advisors and investors will benefit from more low cost choices.”
For more news, information, and analysis, visit the Fixed Income Channel.
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