Vanguard closes Pa., N.J. municipal money market funds, will liquidate both in November

Vanguard is closing two of its municipal money market funds to new investors, and plans to liquidate the funds in November, the firm said Friday.

Vanguard decided to close the two tax-exempt municipal funds, the $1.8 billion Pennsylvania Municipal Money Market and the $1.2 billion New Jersey Municipal Money Market, as supplies of municipal bond securities in the two states dried up.

Shareholders are being notified and have the opportunity to move into another Vanguard fund, including other money market funds, or redeem shares before the liquidation, at which time the fund’s assets will be sold and the proceeds distributed.

“This is not a common Vanguard experience,” said Dan Wiener, editor of the Independent Adviser for Vanguard Investors newsletter

Wiener said the only previous such closure he could recall was the 2017 shutdown of the Ohio Tax-Exempt Money Market Fund after 27 years in operation.

Vanguard said the shrinking supply of short-term municipal securities in Pennsylvania and New Jersey had blocked it from meeting investment goals and maintaining the “diversification and risk profile” of the two funds.

Vanguard will continue to invest in Pennsylvania and New Jersey municipal bonds as part of its national Municipal Money Market Fund and its Pennsylvania and New Jersey long-term tax-exempt funds, according to the firm’s news release.

Vanguard manages $1.9 trillion in fixed income assets worldwide and $6.3 trillion in total.

Guy LeBas, a fixed-income strategist at Janney Capital Management, said larger trends are at work.

States, cities, and other municipal borrowers aren’t issuing short-term paper in large amounts, LaBas said, and instead are selling longer-term bonds. That way, he said, they can pay the current low interest rates over a longer period. But such longer-term bonds aren’t suitable for money market funds.

Over the last year, assets fell 7% in the Vanguard Pennsylvania fund (VPTXX) and 13% in its Garden State counterpart (VNJXX). While the Pennsylvania fund’s yield had dropped to a low 0.01%, New Jersey’s was 0.10% the day of the announcement. Other municipal money market funds have also seen assets decline, as investors take more money out from the funds than new money flows in.

Eric Kazatsky, Bloomberg municipal strategist, said municipal bond exchange-traded funds are now trading at such low fees that they offer the best value. With interest rates very low, a hunt for lower fees should be investors’ focus, he said.

Vanguard Tax-Exempt Bond ETF (VTEB) charges a fee of 0.06%, and iShares Short-Term National Muni Bond ETF (SUB) and iShares National Muni Bond ETF (MUB) charge an annual fee of 0.07%.

“For active management of municipal bonds, those low prices are tough to beat,” he said.