Vanguard’s First New ETF in Two Years Targets Short-Term Munis

Vanguard Group Inc.’s first new exchange-traded fund in two years is setting sail at a turbulent time for municipal debt.

The Vanguard Short-Term Tax-Exempt Bond ETF (ticker VTES), which tracks an index of municipal bonds due in seven years or less, begins trading Thursday, according to a press release. The asset-management giant’s last new ETF was the Vanguard Ultra Short Bond ETF (VUSB), which debuted in April 2021 and now has $3.3 billion of assets.

After a strong start to 2023, US state and city debt suffered its worst February since 2008 as sticky inflation and the Federal Reserve’s resolve to tame it shredded fixed-income returns. But even with the recent swings, ETFs are becoming a force in the muni market: In February, assets in exchange-traded products surpassed the total held in closed-end funds, Barclays Plc data show.

“We’re seeing heightened demand for fixed-income ETFs, muni ETFs in particular, and in fact, muni ETFs are the fastest-growing category,” said Sara Devereux, Vanguard’s global head of fixed-income. “We’re hearing from investors who want to minimize their tax liability through an ETF at the short-end of the yield curve, and VTES fits that need.”