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Vanguard Tax Exempt Fund VWITX to park cash

Started by pat, October 15, 2018, 08:11:51 PM

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pat

Vanguard Tax Exempt Fund VWITX to park cash, its tax free good for people in CA?

jeff

Guess you should ask yourself if the tax benefits are worth the 0.19 expense ratio...

Money Ronin

Am I reading that right where it says the 1 month, 3 month, YTD and 1 year return is negative?

Am I also correct in assuming that the NAV will decrease as interest rates rise?

If "yes" for both, I'd look for something else.

Cheezus

Excuse my complete ignorance with municipal bonds - but I don't quite understand how a bond fund like this would have negative returns.  Isn't the entire purpose of muni's that you get the solid 4% or so tax free with very little or no risk?  How do they manage negative returns?

bf312

Quote from: Cheezus on October 29, 2018, 08:43:29 AM
Excuse my complete ignorance with municipal bonds - but I don't quite understand how a bond fund like this would have negative returns.  Isn't the entire purpose of muni's that you get the solid 4% or so tax free with very little or no risk?  How do they manage negative returns?

Munis aren't exempt from the laws of fixed-income. All things equal, as interest rates rise the price of bonds tend to fall. For a fund that holds a basket of bonds (in the case of VWITX a very large basket - nearly $60Bn worth), the current value of the holdings in the portfolio, or NAV, has fallen as interest rates have recently risen.

The value of the securities that the fund owns are evaluated on a daily basis by third-parties - using recent and comparable trades - and used to compute and report the daily NAV.

To allay your fears of the vulnerability of the coupon payment (aka 4-5% tax-free income munis are known for),  the negative returns in the fund don't necessarily reflect a deterioration in the credit-quality of the underlying securities.

Besides interest-rate risk, there are certainly other factors that can contribute to gains/losses in a fund. Consider the case of Puerto Rico debt. Oppenheimer Funds was one of the largest holders of the island's debt, and consequently suffered larger losses relative to its peers as the government has struggled to pay its debts - and the value of its securities cratered. Certain Nuveen Funds are known for the high degree of leverage they utilize. These are strategic decisions by the portfolio management team in how to construct the portfolio.

bf312

Quote from: pat on October 15, 2018, 08:11:51 PM
Vanguard Tax Exempt Fund VWITX to park cash, its tax free good for people in CA?

It depends on your situation, but note that VWITX is a national fund. Earnings will be federally tax-free, but depending on your state, you may end-up owing state income taxes.

As a resident of CA, there are state-specific muni funds that aim specifically to produce income for CA residents that is both federally and state tax-exempt. Look for something like "California tax-free" or "California tax-exempt" in the name of the fund.

tylerdurden03

That's an intermediate term (interest rate duration) bond fund. For "parking cash" I would use short term vanguard state specific bond funds.

In california I use:

VCTXX - very short duration money market like tax exempt fund

or

VWSUX - not California specific but short duration

As I mentioned I dont think intermediate duration bond funds are appropriate for parking cash.  Stick to short duration unless its a core investment or a medium term hold.