As Munis See Increased Issuance, Here's an Active Choice

Municipal bond issuance is surging, with 2024 seeing $500 billion and 2025 forecasts projecting $560 billion, creating opportunities for investors seeking tax-exempt income. Despite price volatility, yields remain attractive, driving demand for both individual bonds and ETFs like the Vanguard Core Tax-Exempt Bond ETF (VCRM), which offers an inexpensive active management option at 12 basis points, leveraging Vanguard's fixed income expertise.

Analysis

The municipal bond market is experiencing a significant surge in supply, with issuance reaching a record $500 billion in 2024 and forecasts projecting a further increase to $560 billion in 2025. This heavy issuance, described as "raining bonds" by Brian Barney of Parametric Portfolio Associates, is meeting robust investor demand primarily driven by the attractive yields and tax-exempt income offered by municipal bonds, rather than price appreciation, which has seen volatility. According to John Miller of First Eagle, municipal bonds have stabilized post-April volatility but at "a cheaper overall yield level" and haven't rebounded as strongly as other financial assets. In this environment, the Vanguard Core Tax-Exempt Bond ETF (VCRM) is highlighted as a compelling active investment option. VCRM distinguishes itself with a low expense ratio of 12 basis points, challenging the traditional notion that active ETFs are inherently more expensive. The fund leverages the specialized expertise of the Vanguard Fixed Income Group, crucial for navigating the nuances of the municipal bond market, a point underscored by Todd Rosenbluth of VettaFi who noted Vanguard's "tremendous active management expertise" and the growing demand for low-cost fixed income ETF choices.

Key Decisions for Investors

• Investors seeking tax-exempt income should evaluate the current municipal bond market, given the elevated issuance levels providing ample choice and attractive yields despite recent price stabilization at lower levels.
• Consider the Vanguard Core Tax-Exempt Bond ETF (VCRM) as a cost-effective means to gain actively managed exposure to municipal bonds, benefiting from Vanguard's fixed income expertise at a competitive 12 basis point expense ratio.
• Monitor ongoing issuance trends and yield movements in the municipal market, as the current environment of high supply and stabilized prices may present strategic allocation opportunities.