I am planning a similar medium-term savings plan for a home purchase as well, and this is what I've come up with so far: [I'm assuming that you would be investing in a taxable account and have at least a 25% marginal tax rate]
Vangaurd Tax-Exempt Bond ETF (VTEB). It's relatively new, but similar MUNI bonds have shown about 3-4-5% returns. The SEC yield on the bond is about 1.5%. I am not entirely sure, but I believe only the yield portion is tax-exempt, while any appreciation on the ETF itself would be taxable at short-term/long-term capital gains rates. In any case, 1.5% tax exempt yield + small appreciation taxable at capital gains is much better than a high-yield 1% savings account, which is taxable at ordinary income.
If you live in a high-tax state such as NY or CA, you can also invest in state-specific MUNI bond ETFs, although you will pay a transaction fee for purchasing them as they are not Vanguard in-house funds. The advantage here is that the yield is tax-exempt from both federal and state tax (and I am not sure but would assume NYC tax as well). This does create additional risk if NY or CA goes Puerto Rico or Detroit on you, but that's fairly unlikely given the size and diversity of the economies (each economy is equivalent in size to France and South Korea).
I have also considered adding some equity ETF to the medium-term portfolio, but it adds risk. For example, was considering a 20/80 split between VT (Vanguard total world ETF) and VTEB above. The advantage here would be two-fold: (1) adds equity and allows potential increases in gains, albeit with added risk of loss, (2) the VT ETF holds about 45% international, meaning that there could be a slight tax benefit due to the foreign income tax credit/deduction. It's probably a small benefit, and probably should not be a primary motivation. If the risk is acceptable, however, it's an added benefit.
