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Is VWALX a Strong Bond Fund Right Now?

Zacks Equity Research

There are plenty of choices in the Muni - Bonds category, but where should you start your research? Well, one fund that might be worth investigating is Vanguard High-Yield Tax-Exempt Admiral (VWALX). VWALX possesses a Zacks Mutual Fund Rank of 1 (Strong Buy), which is based on nine forecasting factors like size, cost, and past performance.

Objective

VWALX is one of many Muni - Bonds funds to choose from. Muni - Bonds funds invest in debt securities issued by states and local municipalities, which are typically used to pay for infrastructure construction, schools, and other government functions. These securities can be backed by taxes (revenue bonds), but others are known as " general obligation " and are not necessarily backed by a defined source. These bonds are especially attractive because of their inherent tax benefits.

History of Fund/Manager

Vanguard Group is based in Malvern, PA, and is the manager of VWALX. Since Vanguard High-Yield Tax-Exempt Admiral made its debut in November of 2001, VWALX has garnered more than $14.02 billion in assets. The fund's current manager, Mathew M. Kiselak, has been in charge of the fund since July of 2010.

Performance

Of course, investors look for strong performance in funds. This fund has delivered a 5-year annualized total return of 4.7%, and it sits in the top third among its category peers. Investors who prefer analyzing shorter time frames should look at its 3-year annualized total return of 6.36%, which places it in the top third during this time-frame.

When looking at a fund's performance, it is also important to note the standard deviation of the returns. The lower the standard deviation, the less volatility the fund experiences. The standard deviation of VWALX over the past three years is 2.69% compared to the category average of -7.69%. Over the past 5 years, the standard deviation of the fund is 3.46% compared to the category average of -3.21%. This makes the fund more volatile than its peers over the past half-decade.

Bond Duration

Modified duration is a measure of a given bond's interest rate sensitivity, and is a metric that's a good way to judge how fixed income securities will respond in a shifting rate environment.

For investors who think interest rates will rise, this is an important factor to consider. VWALX has a modified duration of 5.95, which suggests that the fund will decline 5.95% for every hundred-basis-point increase in interest rates.

Income

Since income is, of course, a big reason for purchasing a fixed income security, it is always important to consider the fund's average coupon. Average coupon is a look at the average payout by the fund in a given year. For example, this fund's average coupon of 4.96% means that a $10,000 investment should result in a yearly payout of $496.

While a higher coupon is good for when you want a strong level of current income, it could present a reinvestment risk if rates are lower in the future when compared to the initial purchase date of the bond.

Because income is only one part of the bond picture, investors should also consider risk relative to broad benchmarks. This fund has a beta of 0.82, meaning that it is less volatile than a broad market index of fixed income securities. Taking this into account, VWALX has a positive alpha of 0.8, which measures performance on a risk-adjusted basis.

Ratings

Investors should also consider a bond's rating, which is a grade ( 'AAA' to 'D' ) given to a bond that indicates its credit quality. With this letter scale in mind, VWALX has 29.5% in high quality bonds rated at least 'AA' or higher, while 55.98% are of medium quality, with ratings of 'A' to 'BBB'. The fund has an average quality of A, and focuses on high quality securities.

Expenses

For investors, taking a closer look at cost-related metrics is key, since costs are increasingly important for mutual fund investing. Competition is heating up in this space, and a lower cost product will likely outperform its otherwise identical counterpart, all things being equal. In terms of fees, VWALX is a no load fund. It has an expense ratio of 0.09% compared to the category average of 0.62%. From a cost perspective, VWALX is actually cheaper than its peers.

Investors need to be aware that with this product, the minimum initial investment is $50,000; each subsequent investment needs to be at least $1.

Bottom Line

Overall, Vanguard High-Yield Tax-Exempt Admiral ( VWALX ) has a high Zacks Mutual Fund rank, and in conjunction with its comparatively strong performance, worse downside risk, and lower fees, Vanguard High-Yield Tax-Exempt Admiral ( VWALX ) looks like a good potential choice for investors right now.

This could just be the start of your research on VWALXin the Muni - Bonds category. Consider going to www.zacks.com/funds/mutual-funds for additional information about this fund, and all the others that we rank as well for additional information. Want to learn even more? We have a full suite of tools on stocks that you can use to find the best choices for your portfolio too, no matter what kind of investor you are.


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