Vanguards Tax Exempt Muni Bond Funds

[Carol1862]

Can someone answer this question for us:

What are the pros and cons of Vanguard’s Short Term, Intermediate and Long Term Tax Exempt Municipal Bond Funds?

Thank you.

 

[Midpack]

I’m not sure what your questions are. A muni fund is exempt from Federal taxes, some are exempt from state taxes as well if you live in the state e.g. Vanguard California Intermediate-Term Tax-Exempt Fund Investor Shares (VCAIX).

A muni can be useful in taxable accounts, they don’t make sense in deferred or sheltered accounts.

https://www.bogleheads.org/wiki/Municipal_bonds

https://www.morningstar.com/articles/961786/should-you-own-a-muni-fund

This low-cost municipal bond fund seeks to provide federally tax-exempt income and typically appeals to investors in higher tax brackets. The fund invests in high-quality municipal bonds and has a predictable duration profile of about 5–6 years. Risks of the fund include the fact that changes in interest rates, both up and down, can affect the fund by resulting in lower bond prices or an eventual decrease in income for the fund. Investors who are looking for a fund that may provide federal tax-exempt interest income and can tolerate moderate price and income fluctuations may wish to consider this fund.

 

[samm]

The longer the maturity the higher the yield

The longer the maturity the higher the interest rate sensitivity (Google: "bond duration")

Just compare the 3 funds based on yield and duration and determine what is most important to you

Capital gains are taxable on Munis...income is not. With rates this low I would not worry about capital gains

 

[bloom2708]

The downside right now is the municipalities that issue the muni bonds are seeing lower tax revenue. They are getting hit hard by covid. Just like corporate bonds.

This has caused drops in price (lots of sellers, not many buyers) and yield spikes. The Fed stepped in and bought both, so that steadied things for now.

The risk is higher defaults. A slice still may make sense especially if you are in a high state with a state version. Vanguard has NY, NJ, PA, OH, CA versions.

 

[Carol1862]

Thank you for the responses.