I don't want to obnoxiously repeat points already made, but I just think this fund is a poor risk/reward.
Let's start with the reward:
The SEC yield of this bad boy is 3.4%, so that's our best estimate of what one would make over the duration of the fund if all goes smoothly.
At various tax rates this is a TEY of:
0%: 3.4% 20 basis points above the bond index, 100 bps above t-bills
24%: 4.5% in between
32%: 5.0% in between
37%: 5.4% 220 basis points above the bond index, about 300 bps above t-bills
So the reward is between 100-300 bps above the risk free rate for a hold period of the duration of the fund (this is of course an inexact approximation).
Now the risks:
Boat Loads of interest rate risks (weighted average maturity of 18 years).
Relatedly, loads of negative convexity. On account of the apparent gap between maturity and duration (the duration is a lot lower than one would expect given the maturity profile of the fund), this will be a long term bond fund when you don't want it to be and a an indermediate term fund when you don't want it to be.
The above points are indisputable and mathematical. The fund has a lot more downside to a rate move up than upside to a rate move down (that's what negative convexity is).
The more subjective is that why would one lend to New Jersey and Illinois to make 100-300 bps above t-bills. That's like lending to your indebted alcoholic uncle for nothing. Is that really adequate compensation? Look at Puerto Rico. General Obligations were constitutionally sacrosanct but that didn't stop Trump from calling for their wipeout, the government trying to declare the bonds invalid (see the post 2012 issueance argument about the 8% of 2035), etc. Bondholders of indebted governments are not those governments' priority, regardless of the rule of law. Pensioners and teachers unions are far more powerful and easy to empathize with then some "greedy institutional investors" or "wealthy yield pig retail holders of junk muni credit". The GO's have traded from 100 to 20 to 60. Other stuff like the island's utility have taken bigger haircuts.
This could be dismissed as overly pessimistic or a political argument, but I think it should be clear the bet that one is making when one is investing in this fund. One is saying "I want to make 1-3% more than the risk free rate to lend to loss making governments who cant pass a budget that are increasingly indebted and losing population. I expect these government to treat me well if/when SHTF". municipal governments can't print money like the federal one can. And they go bankrupt. and when they try to raise more money people just leave. Unlike the federal government, most people don't leave the US to avoid high property taxes or deteriorating services, but people do leave Detroit, Newark, and Chicago). Now there are plenty of healthy government issuers in this fund, but there's enough in there to make one a little scared.
I think in all likelihood, you won't impair your capital investing in this fund. You'll probably make AGG +/- 2 or 3% in a given year, but there are real risks, and not a ton of huge reward. When you take risks in equities and stuff goes well you make a lot of money. With this you'll make just a little bit more than the risk free alternative.
I am happy to be accused of being overly bearish or thinking i'm smarter than the bond market, but why concentrate one's capital in this narrow sliver of the bond market? This is like investing in Vanguard Energy or Tech instead of VTSAX. Long term bonds of lower credit quality municipal issuers is a small part of the market.
I think looking at the last crisis and thinking that represents a downside scenario is overly backward looking. The next crisis may not look like the last one and it may be driven by these type of bonds. One market prognosticator who called subprime (Meredith Whitney) said that muni defaults would be the next crisis. She's been wrong for 10 years! But maybe she was just early..I don't know, but I just want you to know the bet you're making.
To be clear, the historical default rates of muni bonds is extremely low, suggesting that one will indeed realize that 1-3% above t-bills. But history isn't always necessarily the best guide.
EDIT:
This is more eloquent than my ramblings:
https://www.schwab.com/resource-center/insights/content/are-high-yield-municipal-bonds-high-yield-or-junkEDIT II (responding to the below posts so as to not unnecessarily bump the thread)
That is all correct (but not as big an issue as implied), but it’s prospectus requires VWAHX to invest more than 80% in investment grade municipal bonds.
That does indeed change my view of the credit risk, less so the duration risk.
I think we have provided enough info for the OP and anyone else to make an informed decision. In the paragraphs of my bloviating one can find the potential reasons for not doing it, and in your posts, one can find the reasons why one will probably be okay investing as such.