Vanguard Tax-Exempt: Yield and Stability

10/16/2015 9:00 am EST

Focus: FUNDS

Roger Conrad

Founder and Chief Editor, Capitalist Times


Technical indicators increasingly suggest that the bull market—which began in March 2009—has likely moved into its final phase, possibly capped by a yearend rally, explains Roger Conrad, editor of Capitalist Times.

Our outlook has several ramifications for income-seeking investors:

  • As long as your holdings’ underlying businesses remain healthy and growing, you’re better off hanging on to your dividend-paying stocks through the sell-off. Patience paid off in 1987 and will again.
  • Blowups in individual names remain the biggest risk to investors’ bottom line; selling stocks where the underlying business has deteriorated and won’t recover anytime soon is more critical than ever, even if it means locking in a loss.
  • The correction will give investors an opportunity to pick up high-quality stocks at favorable prices. Keep some powder dry and consider adding some hedges to help offset the pain of a bear market.

With money-market funds and bank accounts offering yields near zero, investors have fewer options where they can park their money and earn a decent return.

Investors should consider Vanguard Intermediate-Term Tax-Exempt (VWIUX) as an alternative.

The mutual fund offers a significantly higher yield with slightly higher risk than money-market funds and similar fare.

This low risk fund focuses on shorter-duration municipal bonds. It has paid tax-advantaged, monthly dividends at an annualized rate of about 3% without any major fluctuations in our principal.

Its massive size ($43.79 billion in net asset value) enables management to limit credit risk through broad diversification.

The more than 5,000 individual bonds in the fund’s portfolio sport an average duration of 4.9 years and 98.4% of these holdings have an investment-grade rating. And the fund’s ten largest holdings account for only 2.29% of its overall assets.

At the same time, the fund boasts one of the lowest expense ratios in its category, which means investors keep more of their returns and management doesn’t need to take on much credit or interest rate risk.

The fund has a long track record of stability, giving up 0.14% of its value in 2008 and posting its biggest loss of the past decade (1.56%) in 2013.

Vanguard Intermediate-Term Tax-Exempt isn’t an FDIC-insured product. But management has proved its ability to protect investors’ principal in up and down markets; the fund remains our favorite place to park cash.

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