Vanguard Tax-Exempt: Safe Haven for Cash

11/21/2016 10:00 am EST

Focus: FUNDS

Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

You can’t blame investors for seeking havens given everything happening in the news, economy, and market. The bull market that began in March 2009 is increasingly long in the tooth, cautions Roger Conrad, editor Conrad's Utility Investor.

Unfortunately, safe havens are extremely rare in the stock market right now, with no sector looking cheap or well positioned for turbulence.

Open-end mutual fund Vanguard Intermediate-Term Tax-Exempt (VWITX) — with a $3,000 initial minimum investment — is my favorite place to park cash in the current environment.

The fund offers a federally tax-exempt annualized yield of about 2.6 percent, paid monthly. That return puts it well above traditional cash alternatives like money-market funds.

There is more interest rate and credit risk than in a savings account. But the fund’s worst year in the past decade was a 1.56 percent dip in 2013. Even in 2008, a year when at least some money-market funds threatened to break their $1 par value, the mutual fund held its value.

Vanguard Intermediate-Term Tax-Exempt minimizes credit risk in two ways. The first method is by simple raw diversification. The fund holds thousands of individual securities, with the 10 largest positions account for only 2.15 percent of its investable assets.

Second, almost all the bonds are of the highest credit quality, with 76.3 percent of the portfolio rated at least AA and only 1.7 percent either below investment grade or unrated.
The high ratings are because municipal bonds rely on government revenues and/or tolls, a reliable stream of money.

The fund also minimizes interest-rate risk by focusing on debt maturing in less than 10 years. Even that overstates the risk management takes, as the average duration is just 4.8 years. And because the fund holds annual expenses to just 20 basis points, investors keep more of their returns.

To be clear, this is not a money-market fund. But based on its charter, current portfolio and track record, I’m as comfortable holding it as I would be a money-market fund.

In fact, Vanguard Intermediate-Term Tax-Exempt is arguably safer than many money markets, because its holdings are completely transparent.

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 Roger Conrad, Editor Conrad's Utility Investor

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