LB Rating Report: Vanguard High-Yield Tax-Exempt Bond Fund (VWAHX)September 12th, 2012 by David Waring
Category: Municipal Bond Fund
LB Rating: ***** 5 Stars
Last Updated: 9/12/12
Vanguard High Yield Tax Exempt Bond Fund Overview
Summary: The Vanguard High Yield Tax Exempt Bond Fund (VWAHX) is a great choice for municipal bond fund investors who are willing to take a little extra risk, for a higher level of income and total return.
Commentary: The volatility of the VWAHX is higher than most investment grade intermediate term bond funds, including its investment grade counterpart, Vangaurd’s Intermediate Term Tax Exempt Municipal Bond fund. However, the fund is significantly less volatile than most other high yield municipal bond funds. It is therefore a great choice for investors who are looking for a fund that will generate a higher level of income and total return, without straying too far off the reservation.
The fund’s yield is currently 2.60%, which is almost a full percentage point higher than the Vanguard Intermediate Term Muni Fund. For someone in the 35% tax bracket that is an after tax yield of 4.0% (to see what it would be for you, use our municipal bond calculator). What you give up for that higher yield is a higher level of volatility. However, the volatility is still low enough that 95% of the fund’s performance tracks the movements of the Barclays Municipal Bond Investment grade bond index. For this reason we view it as a risky intermediate term investment grade municipal bond fund, rather than a high yield municipal bond fund.
Vanguard High Yield Tax Exempt Bond Fund (VWAHX) Rating Criteria
Short-Term Performance: Excellent When measured against the investment grade municipal bond universe over both 1 and 3 year time frames, the Vanguard High Yield Tax Exempt Bond Fund’s performance is stellar. This is especially true over the 1 year time frame where, with a return of 11.42%, it outperformed the average intermediate term municipal bond fund by more than 4%. In both the 1 and 3 year timeframes its performance is in the top 5% of intermediate term investment grade municipal bond funds.
Long-Term Performance: Excellent The fund outperformed the average intermediate term investment grade municipal bond fund by .78% on average per year over the last 5 years and by 1% on average per year over the last 10 years.
Returns relative to risk: Average In short, this fund is riskier than the average investment grade bond fund, but has consistently generated a higher return as well. The fund has an average credit rating of BBB, which is one notch above the lowest of the investment grade ratings. However, less than 10% of the fund is invested in below investment grade or “junk” bonds. The fund is taking on a lot more credit risk than the average investment grade municipal bond fund, but a lot less credit risk than the average high yield municipal bond fund. From an interest rate risk standpoint, the fund’s duration of 6.45 is also higher than the average intermediate term municipal bond fund.
Fees: Excellent As with all Vanguard funds the Vanguard High Yield Tax Exempt Bond Fund has no load fees. The annual expense ratio is .20% which is far lower than most actively managed funds. If you invest more than $50,000 then the fund is also available with an expense ratio of .12%. You can learn more about mutual fund fees here.
Manager Tenure: OK The lead manager on the fund has been with the fund since 2010. Normally we would rate this as poor for manager tenure, however Vanguard places tight risk controls over their managers so a large portion of the performance can generally be attributed to those controls rather than the security the manager selects.