investing

Vanguard High-Yield Tax-Exempt: Don’t Call It Junk

Despite its name, this muni bond fund is keeping an eye on risk.

Names can be deceiving. French fries aren’t really French, and Vanguard High-Yield Tax-Exempt fund (symbol VWAHX) isn’t a high-yield bond mutual fund. In the bond investing world, the words high yield are interchangeable with junk—meaning bond issues rated below investment grade that pay high yields and come with an elevated risk of default. Vanguard High-Yield’s peer group, however, is muni bond funds with long maturities. Though the fund’s 15% stake in junk-rated or unrated muni debt is higher than the category average of roughly 4.5%, the typical fund in the actual high-yield muni category has 10 times that much—45%—in junk and unrated bonds.

The remainder of the fund’s assets are in investment-grade issues. Its yield is a generous 2.3%, which, because income from municipal bonds is exempt from federal taxes, is the equivalent of a 3.9% yield for investors in the highest federal tax bracket.

Should interest rates remain low, the muni market is a relatively safe place to hunt for yield, says Mathew Kiselak, who’s helmed the fund since 2010. In the 10 years through 2016, muni bonds defaulted only 0.18% of the time, compared with a 1.74% default rate for corporate bonds. Even so, the fund’s portfolio is built with a watchful eye toward risk.

FUNDTRENDS.FINAL.indd

Getty Images

Portfolio construction starts with a custom benchmark modeled on the Bloomberg Barclays Municipal index, with a tilt toward lower-quality, higher-yielding names. From there, Kiselak relies on input from Vanguard’s extensive muni bond team. In 2019, the fund began shifting assets from single-A-rated bonds to higher-quality, double-A-rated debt. Within the fund’s slug of triple-B-rated debt (one step above junk and 22% of assets), the team favors bonds backed by revenues from essential services, such as airports, hospitals and toll roads, all of which are unlikely to fare poorly even in a recession.

Low costs allow the fund to deliver nice returns without wading deep into junky waters. The 0.17% expense ratio is less than a third of the average for similar funds. Over the past decade, the fund’s 5.3% annualized return bested 91% of peer funds. The fund has beaten the Bloomberg Barclays muni index in nine of the past 10 calendar years.

Most Popular

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
The 12 Best Tech Stocks to Buy for 2022
tech stocks

The 12 Best Tech Stocks to Buy for 2022

The best tech-sector picks for the year to come include plays on some of the most exciting emergent technologies, as well as several old-guard mega-ca…
January 3, 2022
Can AI Beat the Market? 10 Stocks to Watch
stocks

Can AI Beat the Market? 10 Stocks to Watch

An artificial intelligence (AI) system identifying high-potential equities has been sharp in the past. Here are its 10 top stocks to watch over the ne…
January 14, 2022

Recommended

Is the Stock Market Closed on MLK Day?
Markets

Is the Stock Market Closed on MLK Day?

Both the stock markets and bond markets will have Monday off as the nation honors civil rights leader Martin Luther King Jr.
January 15, 2022
Stock Market Holidays in 2022
Markets

Stock Market Holidays in 2022

Is the stock market open today? Take a look at which days the NYSE, Nasdaq and bond markets take off in 2022.
January 14, 2022
4 Tips on How to Build a Better Bond Position
bonds

4 Tips on How to Build a Better Bond Position

In a world where stock markets keep setting records, bonds look quite dull in comparison. But don’t give up on them! Polish up your bond portfolio usi…
January 12, 2022
5 Beginner Investing Tips for a Healthy Headspace
Becoming an Investor

5 Beginner Investing Tips for a Healthy Headspace

Lousy with numbers? Bad with money? That's OK. By adopting the right mentality, you can learn not only how to invest, but how to do so effectively.
December 30, 2021