I’ve been reading through the prospectus for some of the Vanguard tax-exempt funds. There are four that generally cover the municipal funds markets:
They all have great expense ratios of 0.2% and credit ratings (for what they’re worth) of AA or AA-. What is most interesting to me is a comparison of duration to yield. Duration, in brief, is a standardized measure of bond price sensitivity to changes in interest rates. High duration bonds (or funds) swing more to a 1% change in interest rates than lower duration bonds. When I graph the relationship I get a very straight looking line:
In essence this is the current yield curve for this family of funds. The leftmost point is the short-term tax-exempt bond fund, followed by limited-term, then intermediate term, and finally long-term.
So what was my decision? I bought into 3 of the 4, the short-term, medium-term, and long-term. They all look like great funds. I’ll keep you posted.