Higher Taxes Leads to Surge in Muni DemandDavid Schassler, Portfolio Manager and Head of Portfolio and Quantitative Investment Solutions, VanEckSeptember 24, 2021
The VanEck Muni Allocation ETF (MAAX) tactically allocates among VanEck municipal bond ETFs based on interest rate and credit opportunities to seek capital appreciation plus tax-exempt income. It uses a data-driven, rules-based process that leverages technical and macroeconomic indicators to guide credit and duration exposure, seeking to avoid market risks when appropriate. The expanded PDF version of this commentary can be downloaded here.
The VanEck Muni Allocation ETF (“MAAX”) had a NAV total return of -0.41% versus -0.37% for its benchmark, the Bloomberg Barclays Municipal Bond Index, in August. Over the past 12 months, MAAX is up 5.58% versus 3.40% for its benchmark. MAAX’s taxable equivalent 30-Day SEC yield, based on a 37% federal tax rate, was 4.32% as of August 31, 2021.
Average Annual Total Returns (%) as of August 31, 2021
1 Mo† YTD† 1 Yr Life (05/15/19) MAAX (NAV) -0.41 2.91 5.58 2.92 MAAX (Share Price) -0.36 3.02 5.69 2.98 Bloomberg Barclays
Municipal Bond Index*
-0.37 1.53 3.40 4.31 Quarter-End
Average Annual Total Returns (%) as of June 30, 2021
1 Mo† YTD† 1 Yr Life (05/15/19) MAAX (NAV) 0.72 2.50 7.06 2.97 MAAX (Share Price) 0.87 2.66 7.16 3.05 Bloomberg Barclays
Municipal Bond Index*
0.27 1.06 4.17 4.44
†Returns less than a year are not annualized.
Expenses: Gross 0.35%; Net 0.35%. Van Eck Associates Corporation (the “Adviser”) will pay all expenses of the Fund, except for the fee payment under the investment management agreement, acquired fund fees and expenses, interest expense, offering costs, trading expenses, taxes and extraordinary expenses. Expenses are based on estimated amounts for the current fiscal year. Cap excludes acquired fund fees and expenses, interest expense, trading expenses, taxes and extraordinary expenses.
The table presents past performance which is no guarantee of future results and which may be lower or higher than current performance. Returns reflect temporary contractual fee waivers and/or expense reimbursements. Had the ETF incurred all expenses and fees, investment returns would have been reduced. Investment returns and ETF share values will fluctuate so that investors’ shares, when redeemed, may be worth more or less than their original cost.
The "Net Asset Value" (NAV) of a VanEck Exchange Traded Fund (ETF) is determined at the close of each business day, and represents the dollar value of one share of the fund; it is calculated by taking the total assets of the fund, subtracting total liabilities, and dividing by the total number of shares outstanding. The NAV is not necessarily the same as the ETF 's intraday trading value. VanEck ETF investors should not expect to buy or sell shares at NAV.
*Bloomberg Barclays Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt municipal bonds with a maturity of at least one year.
Returns in municipal bonds were muted last month. Generally, interest rates were lower than most expected as investors re-thought their growth expectations due to the COVID-19 Delta variant. Rates, while still low, did tick up in August, putting downward pressure on bond prices. The yield on the U.S. 10-Year Treasury note increased from 1.17% to 1.31% in August.
In MAAX, the top performing positions were in closed-end funds (“CEFs”) and high yield, which contributed -0.16% and -0.30%, respectively. The bottom performing positions were in long and intermediate duration bonds, which contributed -0.61% and -0.36%, respectively. It is somewhat counterintuitive that CEFs were the top performing funds given the high embedded duration exposure that they carry historically. However, the higher yields offer the ability to cushion these investments from falling bond prices.
We believe that high wage earners in the U.S. are preparing for a future assault on their wallets as President Joe Biden plans to increase the top income tax rate from 37% to 39.6%. Additionally, the corporate tax rate is expected to increase from 21% to 25%. Historically, higher taxes increase the appeal of municipal bonds and drive demand. This year alone, as of July 31, the total flows into municipal funds, both ETFs and mutual funds, was $75 billion versus $57 billion for the full calendar year of 2020!1
Below is the strategy’s average asset allocation mix in August:
VanEck Muni Allocation ETF - August Allocation
The chart below illustrates the performance and contribution to performance for each segment of the portfolio. In August, MAAX continued to gradually reduce exposure to long duration bonds and increase exposure to CEFs. In our view, CEFs offer a unique opportunity, within municipal fixed income, to earn above-market yields.
VanEck Muni Allocation ETF - Return August 2021
Muni Risks & Positioning
The chart below demonstrates that MAAX is maintaining approximately 65% of its exposure in investment grade and approximately 35% in high yield.
MAAX remains bullish on both long duration and high yield bonds, as the model that MAAX follows continues to have an optimistic outlook on the municipal bond market. There are some signs of caution in duration due to the relative outperformance of short-duration bonds relative to long-duration bonds over the short to medium term. However, the preponderance of the other indicators, at this point, continues to suggest that long-duration bonds will outperform.
1 Source: Factset
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Bloomberg Barclays Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt municipal bonds with a maturity of at least one year.
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