Vanguard California Long-Term Tax-Exempt Fund Investor Shares VCITX

Vanguard California Long-Term Tax-Exempt combines experienced leadership with a disciplined approach that stands out and delivers consistently strong results versus muni California long Morningstar Category peers.

Deep muni market experience underpins the team’s stability and consistency. Muni veteran Stephen McFee has managed the portfolio since 2020, along with several of the firm’s single-state municipal offerings. He formally assumed the lead role from longtime manager James D’Arcy in March 2022; D’Arcy remains at the firm overseeing other muni strategies. The firm added Adam Ferguson to the portfolio in late 2023 to bolster the management team’s depth. Ferguson has spent more than two decades at Vanguard and comanaged several of the firm’s municipal offerings.

A sizable cast of analysts and traders enhances the managers’ abilities to uncover relative value opportunities and provide a durable edge over most category peers. The firm also continues to invest in quantitative tools, which have improved this team’s efficiency.

A disciplined process and low fees also create a meaningful advantage over peers. The team builds a diversified, high-quality portfolio that aims for strong risk-adjusted results; it measures those outcomes against a custom benchmark that loosely reflects a higher-quality version of the Bloomberg California Municipal Index. McFee incorporates guidance from senior leaders on the macro framework, which includes duration, sector outlook, and positioning. He works with sector experts to refine the approach through security selection and taps into a dedicated risk team for ongoing portfolio oversight. Instead of making outsize bets on individual names, the team focuses on thoughtful structural trades along the muni yield curve and relative value opportunities across sectors.

This structure gives the managers flexibility to adjust the portfolio when they uncover value. For example, they increased industrial development and pollution control revenue exposure as relative valuations improved in recent years. The December 2025 portfolio’s 11% stake stood roughly 2 percentage points higher than a year earlier.

The managers’ consistent execution and selective tilts have supported strong long-term absolute and volatility-adjusted returns. Since December 2020, McFee’s first full month, the Admiral shares’ 1.2% annualized gain through January 2026 outpaced roughly 70% of distinct peers and the index’s 1.0% return.

A disciplined, risk-conscious process continues to stand out from peers. The strategy earns an Above Average Process rating.

The team executes a well-defined investment framework that continues to add long-term value in the California muni market. It manages to an internal benchmark built from the investable universe of high-quality, liquid muni bonds with characteristics broadly aligned with the Bloomberg California Municipal Index. Vanguard’s senior investment committee, a group of fixed-income leaders, set the macro outlook, which guides duration, yield curve, and sector tilts. The muni sector teams offer more specialized insights and narrow the opportunity set through bottom-up security selection, using proprietary models that assess each bond’s fit with the strategy’s mandate. The managers integrate this research to position the portfolio relative to the custom index and work closely with a dedicated risk team that provides continuous oversight.

Given its ongoing ultralow-fee advantage, the managers do not need to take outsize bets to remain competitive. Therefore, the team typically treads lightly in more-volatile areas of the muni market, such as Puerto Rico. As part of its risk discipline, the portfolio’s sector exposures and yield-curve stance rarely stray far from the internal benchmark. The team also keeps at least 4% of assets in cash and cash equivalents to maintain ample liquidity.

The managers keep the fund’s duration close to its internal benchmark, which ranged between 5.0 and 9.0 years for the trailing five years ended December 2025, but adjust it with guidance from the senior investment committee, which may cause the fund’s duration to diverge from the Bloomberg California Municipal Index. For instance, in 2025, they saw attractive value at the longer end of the muni yield curve and extended the overall duration; its 8.3-year duration as of December 2025 was 0.9 years longer than a year ago.

This portfolio has historically kept a higher-quality bias relative to peers, but that’s been less distinct over the past few years. As managers have remained optimistic about fundamentals, they began allocating modest amounts to midquality bonds. The portfolio’s 70% exposure to higher-quality debt rated AA or above as of December 2025 was about 2 percentage points below the five-year average.

The team emphasizes diversification and typically keeps at least 80% of assets, which is exempt from federal and California state taxes: No position exceeds 2% of assets, and most represent only a handful of basis points. Local general-obligation bonds (19% as of December 2025), industrial development and pollution control (11%), and hospital revenue bonds (9%) are notable sector allocations. Managers have leaned into industrial development—especially prepaid gas—as that segment has grown; the portfolio’s allocation as of December 2025 was roughly 6 percentage points higher than three years earlier. Housing is another key focus; the fund’s 6% allocation in this stake was about 4 percentage points higher than three years prior.

The managers saw less attractive value in transportation revenue sectors, including toll roads and airports, and they have trimmed these exposures in recent years. The fund’s 4% allotment to this area as of December 2025 was roughly 3 percentage points lower than three years ago.

Seasoned leadership and deep supporting resources provide a clear edge over most peers. The strategy earns an Above Average People rating.

A veteran management team leads this strategy. Stephen McFee started managing this fund in November 2020 and formally took the reins in March 2022 from James D’Arcy, who remains at the firm and manages other municipal strategies. McFee has been with the firm for more than two decades and started managing several of the firm’s single-state muni strategies in February 2020. He serves as a leading voice that guides the broader muni suite’s positioning on various revenue sectors, including education, and he now manages this portfolio alongside muni veteran Adam Ferguson, who brings nearly two decades of industry experience and joined the portfolio roster in late 2023 to add depth. The duo has worked together for more than a decade at the firm, and their collaboration continues to strengthen.

They draw support from a seasoned analyst and trading team. This 28-member group averages more than a decade of industry experience and forms one of the largest muni research teams in the industry. The analysts provide both fundamental and relative value insights, which strengthen the team’s collaboration and improve the managers’ security selection process. Over the years, the team has also enhanced its toolkit with proprietary quantitative models, which further improved efficiencies.

Manager ownership, which reflects alignment with investors, could be better in the strategy and across the muni complex. McFee and Ferguson do not personally invest in the fund.

Vanguard maintains its High Parent Pillar rating as it continues to grow under new leadership.

CEO Salim Ramji has had a busy first year captaining Vanguard’s crew, and the ship remains pointed in the right direction. The firm made its largest round of fee cuts in early 2025, which came at an estimated cost of USD 350 million. It established a separate division dedicated to its advice and wealth management efforts, a sign that it wants to seriously compete within those lines of business. Asset growth has continued to be a huge success. Only BlackRock’s inflows rival the money Vanguard is taking in. Likewise, the number of clients it serves has more than doubled since 2015.

Despite that success, an ever-growing number of clients has presented a challenge: Vanguard can’t grow its services fast enough to keep up with demand. In some instances, it has had to curb certain services and capabilities or raise fees on others to cope, causing some loyal clients to criticize what they perceive as deteriorating services.

Vanguard has ambitions to bring its disruptive legacy to the bond market. It created roughly a dozen low-cost bond exchange-traded funds for US investors and several others abroad over the 12 months through June 2025. All have low fees in their respective categories, and the actively managed strategies align with Vanguard’s philosophy. They are relatively easy to understand and are conservatively managed.

Vanguard has another opportunity to prove that clients are still its priority. On the surface, its endeavor into the high-fee deal-making world of private assets alongside Wellington and Blackstone looks like a cultural mismatch. So far, the collaboration hasn’t produced anything that’s concerning.

Long-term absolute and volatility-adjusted returns are compelling.

Over manager Stephen McFee’s tenure from December 2020 through January 2026, the fund’s admiral shares’ 1.2% annualized gain beat more than two-thirds of the muni California long category and beat the Bloomberg California Municipal Index by 16 basis points. The strategy’s information ratio (a measure of excess return over excess standard deviation versus the benchmark) also outpaced two-thirds of its peers.

The portfolio’s higher-quality tilt relative to peers hasn't necessarily weighed on performance. In 2020, the strategy had a strong year even when the muni market significantly rebounded after the first quarter’s pandemic-driven selloff; its 5.6% gain for the calendar year landed in the top quartile of distinct peers. In the choppy markets of 2022, the strategy provided some protection thanks to strong security selection in airport and port revenue bonds. Its 10.0% loss that year, while painful in absolute terms, was 39 basis points better than the typical rival.

When below-investment-grade debt outperformed investment-grade bonds in 2024, the strategy’s performance lagged peers slightly. The fund’s 2.2% gain that year outpaced its index by 115 basis points, but it trailed the peer median of 2.7%.

In 2025, the portfolio’s overweighting in housing bonds contributed to outperformance. Over the full year, the fund’s 4.0% return topped almost all peers.

Vanguard CA Long-Term Tax-Exempt Inv's Prospectus Adjusted Expense Ratio is 0.14% per year. It places it in the cheapest quintile of the Morningstar US Fund Muni California Long Category, where the median fee is 0.58% per year. This cost positioning translates into a Medalist Rating Price Score of 2.35, which reflects its relative price positioning within the category. The Price Score ranges from -2.50 (most expensive) to +2.50 (cheapest), with higher scores indicating better cost competitiveness.