Economics and markets
Vanguard’s Malloy: The many strengths of municipals
March 24, 2025
Thanks to decades-high yields, the fiscal strength of state and local governments, and the diversification they offer to equity-centric portfolios, municipal bonds stand tall as an appealing option for investors.
That was the central argument made by Vanguard Head of Municipals Paul Malloy in a recent appearance on Barron’s Live. Malloy also addressed:
- How to approach investing in municipal bonds: Low-cost mutual funds and exchange-traded funds (ETFs) can provide diversification, protecting against individual issuer risks, and minimize the impact of costs on municipal investors’ long-term returns.
- Munis’ advantageous return profile: Munis are on track to offer strong returns this year, with tax-equivalent yields over 6%. Over longer periods, they may provide equity-like returns on an after-tax basis with less downside risk and higher credit quality.
- Possible tax policy changes: The risk that municipals’ tax-exempt status will be completely eliminated is considered low due to their critical role in infrastructure financing. However, tax law changes are possible, and Malloy recommended consulting with a professional to help manage such investments.
- Recession resistance: In a recession, municipal bonds can excel.
Return comparison details: Mutual fund/ETF returns versus separate account returns
For various periods ended December 31, 2024, Morningstar-defined universes of national municipal mutual funds and ETFs outperformed Morningstar-defined universes of national municipal separate accounts (SAs). Mutual funds and ETFs outperformed SAs in short-, intermediate-, and long-term maturity universes, as follows:
Notes: All returns are annualized and gross of fees, as of December 31, 2024. Past performance is not a guarantee of future returns. SA stands for separate account.
Source: Morningstar, as of March 17, 2025.
Notes:
For more information about Vanguard funds, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.
Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.
Credit quality is a measure or assessment of an entity’s ability and willingness to pay their debt obligation. Lower credit quality is associated with a higher risk of default.
Investment-grade bonds: Bonds rated Baa3/BBB- or better by the major rating agencies (Moody’s, Standard and Poor’s, and Fitch).
All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.
Although the income from a municipal bond fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund’s trading or through your own redemption of shares. For some investors, a portion of the fund's income may be subject to state and local taxes, as well as to the federal Alternative Minimum Tax.
Bond funds are subject to interest rate risk, which is the chance bond prices overall will decline because of rising interest rates, and credit risk, which is the chance a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline.
Past performance is no guarantee of future results.
