Summary: The Vanguard Intermediate-Term Tax-Exempt Fund (VWITX) would be a solid choice for a passive national municipal bond fund.
Commentary: With $36 Billion under management the Vanguard Intermediate Term Tax Exempt Fund is the largest municipal bond fund in the world. Because of its size this is technically an actively managed fund. It is too big to be 100% passively managed in the less liquid municipal bond market. However, the managers hold themselves to very tight restrictions in relation to the underlying municipal bond index it tracks, so it resembles a passively managed fund more than an active fund. The fund also gives you similar performance but with less volatility than another popular passive national municipal bond fund the MUB ETF. This is why we list it as a passive fund. (you can learn more about passive vs active funds here)
This is a great fund, but that does not mean that you will not lose money investing in the fund. Currently the fund has a duration of around 5 years. This means that if interest rates rise by 1%, the fund will lose 5% in value. If interest rates don’t change you should earn around 1.66% per year from interest payments, per year, based on the fund’s current SEC yield. Keep in mind that 1.66% is before taxes. The taxable equivalent yield for someone in the 35% tax bracket would be 2.55%. To see what it would be for you, use our municipal bond calculator here.
Fees: Excellent Compared to active municipal bond funds and on absolute basis, the annual expense fee of 0.20% is tiny. Those with $50,000 or more to invest can also access the same fund in admiral shares format at an expense ratio of .12%. You can learn more about bond mutual fund fees here.
Tracking: Good Over 3 and 5 year time periods, more than 97% of the fund’s performance can be attributed to changes in its benchmark index. Its benchmark index is the Barclays Intermediate Term National Municipal Bond Index does an excellent job tracking the US investment grade, intermediate term, national municipal bond market.
Liquidity: Good With $36 Billion under management you would think that the illiquid nature of the municipal bond market would affect the performance of the fund. However, as evidenced by its solid tracking of its benchmark index, it has not been a problem for the fund up to this point.
Vanguard also has a good track record of closing funds to new investors that get too large, which it recently did with its high yield corporate bond fund.