Two Vanguard Funds Finally Launch

Vanguard Launches Two New Funds

It took a while, but Vanguard finally pulled off the launch of two new funds this week. While the Alternative Strategies fund will be out of the reach of most individual investors, the oft-delayed Tax-Exempt BondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. Index may be of interest to those looking for a low-cost index or ETFA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index. covering the national municipal bondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. market.

Vanguard Tax-Exempt Bond Fund Finally Debuts

On August 25, Vanguard officially introduced Tax-Exempt Bond Index fund, its first municipal bond index fund, after a half-dozen false starts. Here’s a final rundown of Tax-Exempt Bond Index’s countdown to launch.

In June 2010, Vanguard filed to launch three muni bond index funds and ETFsA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index. before withdrawing the application six months later and going mum on the topic.

Then, as we’ve covered extensively, Vanguard announced plans in January 2015 to launch a single municipal bond index fund on April 7 before pushing its opening back six times.

Now that it’s finally available to investors, we thought we’d take a look under the hood and share what we know about the new fund. It comes in three share classes: Investor (ticker symbol: VTEBX), Admiral (VTEAX) and ETF (VTEB).

The Investor class shares require a $3,000 minimum investment, and charges 0.20% in operating expenses along with a 0.25% front-end load. Investors with deeper pockets can invest in the Admiral shares, which carry a reduced 0.12% expense ratio (along with the same 25-basis-point front-end load), by meeting the $10,000 minimum.

Our expectation is that the ETF shares—which also charge a 0.12% expense ratio, but have no investment minimum or purchase fee—will end up with the most assets of the three share classes.

Tax-Exempt Bond Index’s objective is to track the performance of the S&P National AMT-Free Municipal Bond index, which has an average maturity of about 14 years and a portfolio of more than 10,000 bondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. across the investment-grade, muni-bond spectrum.

As befitting Vanguard’s low-cost reputation, the new fund undercuts the industry average by a significant margin. The average expense ratio of municipal bond funds in Lipper’s General and Insured Municipal Debt Funds category was 0.95% as of Dec. 31, 2014. Similar ETFs carried average fees of 0.28%.

The iShares National AMT-Free Muni Bond ETF—which tracks the same index and has more than $5 billion in assets—is Tax-Exempt Bond Index’s most immediate competition. The iShares product launched in 2007, a nice early edge, but that’s nothing new with Vanguard and the ETF space, where it has regularly entered late and won market share through lower costs. With an expense ratio less than half of the 0.25% charged by the iShares ETF, Vanguard Tax-Exempt Bond ETF enters the market with a decided cost advantage.

Vanguard Alternative Strategies Fund Now Available

As we reported earlier this summer, Vanguard’s Alternative Strategies fund was approved for launch in late May, but just started trading on August 11—and only for a select, institutional audience, which includes Vanguard itself.

As a refresher, the fund is an unusual one in the Vanguard universe, which is typically known for its low-cost, straightforward stockA financial instrument giving the holder a proportion of the ownership and earnings of a company., bond and money market options. Alternative Strategies, managed by Michael Roach from Vanguard’s in-house Quantitative EquityThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid. Group, looks to deliver positive returns in all market environments by employing “alternative” investment strategies involving long and short positions in stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company., bonds, commodities and currencies. The ultimate aim is gains with low correlation to stock and bond markets with less volatilityA measure of how large the changes in an asset’s price are. The more volatile an asset, the more likely that its price will experience sharp rises and steep drops over time. The more volatile an asset is, the riskier it is to invest in. than stocks.

Given Vanguard’s decades-long stance against relatively exotic investment strategies, Alternative Strategies stands out as an anomaly, but most retail investors will be locked out of the fund (which carries a $250,000 minimum and charges 1.10% in expenses) because Vanguard is solely offering it through its institutions-only advisory service at first. Vanguard has said the fund will eventually assume an approximately 10% position in the Managed Payout fund-of-funds, and we expect it will replace two former sleeves: Commodities, once owned by an internal fund but recently accessed via the PowerShares DB Commodity Index Tracking fund; and long-short strategies represented by Vanguard’s Market Neutral fund.

We’re not convinced that limiting the fund to institutional investors is the right call here. Vanguard says that adding the alternative fund to Managed Payout will “provide further diversificationA strategy for managing investment risk by investing in a mixture of different investments. Since different asset classes face different risks, even if one type of asset declines in value, others may not. and reduce portfolio volatility.” (We’d note here that they don’t mention improving returns.) There are certainly outside advisers and individual investors who would like the opportunity to add those benefits to their portfolios. For now, they’ll have to wait for a low-cost, accessible alternative fund.

Maybe the wait is a good thing. Whether Vanguard can provide an alternative fund worth investing in is a question only time will answer.

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