Vanguard "Risk Potential" for Mass Muni Fund

[Call_Me_Op]

As most of you know, Vanguard rates funds for their "risk potential" on a scale of 1-5. The Massachusetts Tax-Exempt Fund is rated as a 3 on this scale. This is the same risk rating it gives to 60/40 balanced funds. It seems to me that this muni fund, with mostly AAA and AA rated bonds and a 6 year duration is far less risky than a fund holding 60% in equities. This fund hardly budged in 2008 when the balanced funds headed south. Can anyone explain why Vanguard would rate this muni fund as being so risky?

https://personal.vanguard.com/us/funds/ ... IntExt=INT

[BYUvol]

As most of you know, Vanguard rates funds for their "risk potential" on a scale of 1-5. The Massachusetts Tax-Exempt Fund is rated as a 3 on this scale. This is the same risk rating it gives to 60/40 balanced funds. It seems to me that this muni fund, with mostly AAA and AA rated bonds and a 6 year duration is far less risky than a fund holding 60% in equities. This fund hardly budged in 2008 when the balanced funds headed south. Can anyone explain why Vanguard would rate this muni fund as being so risky?

https://personal.vanguard.com/us/funds/ ... IntExt=INT

There is a risk of default by the municipalities that wasn't realized in Massachusetts 2008. Personally, I don't think it is that risky, but after all the banks got sued for under representing risk on subprime mortgages, banks would rather cover themselves by overstating risk, rather than understating risk.

[Call_Me_Op]

Thanks BYU. I had a hunch it was due to all of the bond issues being concentrated with a single state - despite the solvency of that state.

[ObliviousInvestor]

Thanks BYU. I had a hunch it was due to all of the bond issues being concentrated with a single state - despite the solvency of that state.

They put the Long-Term Tax-Exempt fund at 3 out of 5 on the risk scale as well, despite it being diversified among multiple states and despite it having a (very slightly) shorter average duration than the Massachusetts Tax-Exempt fund.


On the above Morningstar chart, the yellow line (Vanguard Total Bond) has a 2-out-of-5 risk rating. The other three funds are all rated at 3/5.

Looks to me like the tax-exempt funds (blue and green in the chart) have historically been much closer in risk to Vanguard Total Bond than to Vanguard Balanced (orange in the chart).

My best guess is that Vanguard is labeling them 3/5 in order to warn against a not-yet-seen risk.