Vanguard High Yield Tax Exempt Fund

Scorecard
5 / 5 Stars
Lipper
5 5 3 5 5
Zacks Investment Research
1 (Strong Buy)
Standard & Poor's
5 / 5 Stars
TheStreet.com
A (Buy)

#2 in Muni National Interm

U.S. News evaluated 82 Muni National Interm Funds. Our list highlights the top-rated funds for long-term investors based on the ratings of leading fund industry researchers.

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Performance

The fund has returned -0.37 percent over the past year, 6.81 percent over the past three years, 7.33 percent over the past five years, and 4.49 percent over the past decade.

Trailing Returns Updated 02.28.2014
Year to date 4.0%
1 Year -0.4%
3 Years (Annualized) 6.8%
5 Years (Annualized) 7.3%
10 Years (Annualized) 4.5%

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Summary

For the Vanguard High Yield Tax Exempt fund, higher risks have traditionally translated into higher rewards.    

As of March 05, 2014, the fund has assets totaling almost $7.10 billion invested in 956 different holdings. Its portfolio consists of municipal bonds (debt issued by state and local governments, as well as their agencies).   
   
Compared with its peers, this fund digs deeper into the credit spectrum and takes on more interest-rate risk in search of higher yields. Since 2009, that’s worked out quite well, when the fund rocketed to a 20 percent return. In the fixed-income universe, that’s a staggering number. But the fund’s added risk magnified its losses in 2008, when the recession stung muni bonds, particularly those with lower ratings. That year, the fund lost upwards of 8 percentage points more than the average for its peer group, according to Morningstar. Currently, roughly 15 percent of the fund’s bond holdings are rated BBB, and this allocation has added value during the muni market’s recovery. But flirting with lower-rated bonds is only one component of the fund’s strategy. To stretch for yield, the fund also keeps a relatively high average duration. At the moment, with interest rates at historic lows, yield-starved investors have valued this approach. But when rates eventually creep back up, funds with higher durations will feel more pain. The higher a fund’s average duration, the more interest rate risk it takes on. When interest rates go up, bond prices go down. The fund has returned -0.37 percent over the past year and 6.81 percent over the past three years.    
 
Historically, the fund has done a fine job of achieving its goal: providing investors with steady income and tax advantages (muni investors traditionally do not need to pay federal income taxes on their interest). Over time, the additional risk it has taken on has translated into higher rewards. As of the end of October, the fund’s 10-year annualized returns beat those of its peer group by 0.7 percent, according to Morningstar. The fund has returned 7.33 percent over the past five years and 4.49 percent over the past decade.    
 

Investment Strategy

In an effort to increase the fund’s yield, management dips down into the credit spectrum. Currently, roughly 15 percent of the fund’s bond holdings are rated BBB, the lowest rating that is still considered to be investment grade. Still, it compensates by maintaining an above-average allocation to A-rated fare. Compared with its peers, the fund maintains a relatively high average duration, which will often result in higher yields but also increases its interest-rate risk.

Role in Portfolio

Morningstar calls this fund a “supporting player.”

Management

Christopher Alwine and Mathew Kiselak manage the fund.

Fees

Vanguard High Yield Tax Exempt Fund has an expense ratio of 0.20 percent.

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Risk

Going forward, one of the bigger risks is rising interest rates. When interest rates go up, bond prices will fall.

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