Vanguard Ultra Short-Term Tax-Exempt Fund Class Admiral VWSUX

Vanguard Ultra Short-Term Tax-Exempt combines experienced leadership with a disciplined approach that stands out and has delivered strong risk-adjusted results versus muni-national short Morningstar Category peers over the long haul.

This ultrashort strategy carries the lowest interest rate risk in Vanguard’s muni lineup. The team typically keeps the duration around 1.2 years, which means the strategy is an outlier among its national short-term muni peers, whose durations can extend up to about 5.0 years.

Still, 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 Year Index. Portfolio managers incorporate guidance from senior leaders on the macro framework, which includes duration, sector outlook, and positioning. They work with sector experts to refine the approach through security selection and tap into a dedicated risk team for ongoing portfolio oversight. Instead of making outsized bets on individual names, the team focuses on thoughtful structural trades along the muni yield curve and relative value opportunities across sectors.

Deep muni market experience underpins the team’s consistency. Manager Stephen McFee has led this strategy since late 2023 after former lead Justin Schwartz transitioned to the firm’s muni index and money market team. McFee began managing several of Vanguard’s muni strategies in 2020, and now he oversees three muni strategies. He works with comanager Adam Ferguson, who joined the manager roster at the same time and specializes in revenue bonds. Ferguson has spent more than two decades at Vanguard and leads several offerings, including Vanguard Limited-Term Tax-Exempt.

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

The fund’s ultrashort focus can result in underperformance versus more interest rate-sensitive offerings in the muni-national short category, which includes only a few peers with an ultrashort mandate and a long track record. Since McFee took over the strategy in November 2023, the admiral shares’ 4.5% annualized return through January 2026 beat the index’s 3.9% gain, but it was slightly worse than the category peer median’s 4.7% 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 Year Index. Vanguard’s senior investment committee, a group of fixed-income leaders, sets 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 outsized bets to remain competitive. The team therefore treads lightly in 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.

Managers seek to boost the strategy's returns by finding mispriced bonds within the short-term range of the muni universe while maintaining a sufficient amount of liquidity. A common approach is to rotate into floating-rate notes, a natural domain among very short portfolios. Variable-rate demand notes and other more-traditional floating-rate securities comprised around 20% of the December 2025 portfolio, which was roughly 6 percentage points higher than a year ago, as the managers saw more opportunities in floating-rate debt.

This strategy is not a perfect fit in the muni-national short category because of its ultrashort duration profile. The managers keep the fund’s duration close to its internal benchmark, which has ranged between 0.9 and 1.4 years for the trailing five years ended December 2025, but adjust it with guidance from the senior investment committee. Those shifts can lead to the fund’s duration diverging from the Bloomberg Municipal 1 Year Index and the category peers; its 1.3 years as of December 2025 was about a year shorter than the category 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 well below its five-year average 63%.

The team emphasizes diversification. Hospitals (15% as of December 2025), industrial development and pollution control (20%), and housing revenue bonds (16%) are notable. Managers have leaned into industrial development—especially prepaid gas—as that segment has grown; the portfolio’s allocation as of December 2025 was roughly 10 percentage points higher than three years earlier.

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. Lead manager Stephen McFee formally took the reins from the former lead Justin Schwartz in October 2023 as Schwartz transitioned to Vanguard’s municipal index and money market team. McFee has been with the firm for more than two decades and started managing several of the firm’s single-state muni strategies in March 2020. He serves as a leading voice that guides the broader muni suite’s positioning on various revenue sectors, including education. McFee now manages this portfolio alongside Adam Ferguson, who brings nearly two decades of industry experience and joined the portfolio roster alongside McFee in 2023. Ferguson provides expertise in various high-yield sectors. 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 their 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 invests between USD 10,001 and USD 50,000, 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.

The strategy has delivered solid results under lead manager Stephen McFee’s brief tenure.

This ultrashort muni fund, along with other strategies that have durations shorter than 1.0 year, sits in the muni-national short category, which can make performance comparisons difficult.

Over McFee’s tenure since November 2023 (his first full month), the fund’s 4.5% annualized gain through January 2026 trailed roughly two-thirds of peers but topped the Bloomberg Municipal 1 Year Index by 55 basis points; however, when compared with a subset of distinct ultrashort peers, it was better, outpacing roughly 90% of that subgroup. The strategy’s information ratio (a measure of excess return over excess standard deviation versus the benchmark) also topped all peers in that subgroup.

The strategy's dedication to a higher-quality profile relative to peers hasn't necessarily weighed on performance when muni markets are strong. The strategy’s loss through the pandemic-related market selloff in 2020’s first quarter was also less severe than over 70% of distinct peers.

In addition, the structural shorter-duration profile mitigates volatility and provides benefits during the rising yield environments. As such, when long-term yields rose in 2022, the fund held up better than the typical peer and index. Over that calendar year, the fund’s 0.7% loss was less severe than the peer median’s and index’s 3.0% and 1.1% drop, respectively.

Vanguard Ultra Short-Term Tx-Ex Adm's Prospectus Adjusted Expense Ratio is 0.09% 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 2.36, 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.