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Vanguard's New Venture: Indexing Muni Bonds

Stable market conditions and client demand signal the right time for the firm to launch the first tax-exempt index open-end mutual fund.

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In August 2015, Vanguard launched the market's first tax-exempt index open-end mutual fund, Vanguard Tax-Exempt Bond Index (VTEAX), which also features an exchange-traded fund share class, Vanguard Tax-Exempt Bond (VTEB).

Muni indexing isn't a new concept for the firm. Vanguard had filed to launch three new muni index funds several years ago, and representatives argue that it had the mechanics in place to successfully track the indexes at that point. However, Vanguard withdrew the request with the Securities and Exchange Commission in January 2011 amid market turbulence and outflows. Volatile market conditions and a surge of outflows didn't augur well for a successful muni index fund launch. More recently, however, muni market conditions have stabilized, with investors having returned anew to muni funds in 2014 and early 2015 amid improving issuer fundamentals and receding headline risk. This should allow a newly launched index fund to build assets more quickly and therefore better track its index.

Elizabeth Foos does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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