Vanguard Limited-Term Tax-Exempt Fund VMLTX

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

Deep muni market experience underpins the team’s stability and consistency. Industry veteran Adam Ferguson has led this portfolio since 2017 and has contributed to the firm’s municipal franchise since 2013. He works with comanager James D’Arcy, who joined the manager roster in late 2023 to bolster the management team. D’Arcy has spent more than a decade at Vanguard and comanages several of the firm’s municipal offerings.

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

A disciplined process and low fees 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 Municipal 1–5 Year Index. Ferguson 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 see value. For example, they increased housing revenue exposure as relative valuations improved in recent years. The fund’s 11% stake as of December 2025 stood roughly 3 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 June 2017, Ferguson’s first full month, the Admiral shares’ 2.2% annualized gain through January 2026 outpaced roughly 80% of distinct peers and the Bloomberg Municipal 1-5 Year Index’s 1.8% 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 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 Municipal 1-5 Year Index. Vanguard’s senior investment committee, a group of fixed-income leaders, set the macro outlook that guides duration, muni yield curve, and sector tilts. The muni sector teams offer more specialized insights and narrow the opportunity set through bottom-up security selection. The teams use proprietary models that assess each bond’s fit with the strategy’s mandate. The managers utilize 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. The team therefore treads lightly in the more volatile areas of the muni market, including segments 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 has ranged between 2.2 and 2.7 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 Municipal 1–5 Year Index. For instance, in 2025, they saw attractive value at the longer end of the muni yield curve and extended the overall duration by about one-fifth of a year, bringing the fund’s duration to 2.7 years as of December 2025, about two-fifths of a year longer than the peer median.

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 muni fundamentals, they began allocating modest amounts to midquality bonds. The strategy’s 49% in higher-quality AA or above rated debt as of December 2025 was about 6 percentage points below the five-year average.

The team emphasizes diversification on the short end of the muni curve. No position exceeds 2% of assets, and most represent only a handful of basis points. Hospitals (15% as of December 2025), housing (11%), and industrial development and pollution control revenue bonds (21%) are notable sector allocations. Managers have leaned into industrial development as that segment of the market has grown; the portfolio’s 21% stake as of December 2025 was roughly 8 percentage points higher than three years earlier. Housing is another key focus, and the allocation was about 5 percentage points higher than three years prior.

The managers saw less attractive value in transportation revenue sectors, and they have trimmed these exposures in recent years. The fund’s 6% allotment to this area as of December 2025 was roughly 2 percentage points lower than three years ago.

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

A veteran team leads this strategy. Lead manager Adam Ferguson has been at the helm since May 2017, though his tenure with Vanguard’s municipal group dates back to 2013. He has played a central role in shaping the broader muni suite’s positioning in riskier sectors such as healthcare, charter schools, and project finance. Ferguson manages alongside muni veteran James D’Arcy, who brings more than three decades of industry experience and joined the portfolio roster in late 2023 to add depth. The two have worked together for more than a decade at the firm, and their collaboration continues to strengthen.

The managers 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 firm has also enhanced its toolkit with proprietary quantitative models, which further improved the team’s process and efficiencies.

Manager ownership, which reflects alignment with investors, could be better in the strategy and across the muni complex. D’Arcy invests between USD 50,001 and USD 100,000, while Ferguson does not invest any money 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 lead manager Adam Ferguson’s tenure from June 2017 through January 2026, the fund’s Admiral shares’ 2.2% annualized gain beat roughly 80% of muni-national short category peers and the Bloomberg Municipal 1-5 Year index by 33 basis points. The strategy’s information ratio (a measure of excess return over excess standard deviation versus the benchmark) also topped almost all peers.

The portfolio’s higher-quality tilt relative to peers hasn't necessarily weighed on performance when muni markets are strong. In 2020, the strategy had a strong year despite the muni market’s significant rebound after the first quarter’s pandemic-driven selloff; its 3.4% gain for the calendar year landed in the top quartile of distinct peers. In 2022 and 2023’s choppy markets, the strategy provided some protection and beat more than half and two-thirds of peers, respectively. Strong security selection in transportation and hospital revenue bonds helped in 2022, and picks within industrial development revenue and pollution control revenue bonds supported stronger returns in 2023.

However, when below-investment-grade debt outperformed investment-grade bonds in 2024, the strategy’s performance lagged peers slightly. The fund’s 2.7% gain that year outpaced its index by 86 basis points, but it trailed the peer median’s 2.8% return.

In 2025, the managers’ focus on housing bonds contributed to outperformance. Over the full year, the fund’s 4.7% return ranked in the category’s top quintile.

Vanguard Ltd-Term Tx-Ex's Prospectus Adjusted Expense Ratio is 0.17% per year. It places it in the cheapest quintile of the Morningstar US Fund Muni National Short Category, where the median fee is 0.44% per year. This cost positioning translates into a Medalist Rating Price Score of 2.24, 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.