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  • Municipal Bonds

    MAAX Adds to Duration and it Rallies

    David Schassler, Portfolio Manager and Head of Portfolio and Quantitative Investment Solutions, VanEck
    May 14, 2021
     

    The VanEck Vectors® 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.

    Overview

    The VanEck Vectors® Muni Allocation ETF (“MAAX”) had a NAV total return of 1.10% versus 0.84% for the Bloomberg Barclays Municipal Bond Index. MAAX’s taxable equivalent 30-Day SEC yield, based on a 37% federal tax rate, was 4.17% as of April 30, 2021.

    MAAX added duration at the beginning of April based on the model’s view that the impressive rise in interest rates would take a pause. And that is exactly what happened. The stabilization of interest rates in April was unexpected to many because of the warmer than expected inflation data and strong employment and growth data. However, interest rates selling off, despite this data, was an indication that this information was already priced in. The model understands that, historically, interest rates are mean reverting, meaning that rapid surges in interest rates are typically met with some type of cool down period and often modest declines in the short term. Inflation and growth pressures may still continue to challenge interest rates, but a near-term surge seems unlikely.

    The chart below demonstrates the changes in the yield of the U.S. 10-Year Treasury note over the past two months. MAAX reduced its interest rate risk on February 26, when the yield was 1.40%, and then added interest rate risk on April 6, when the yield was 1.66%. The yield fell to an intra-month low of 1.54% and closed the month at 1.63%.

    10Y Treasury Yield

    10Y Treasury Yield

    Source: U.S. Treasury

    This tactical shift to increase duration benefited MAAX in April as long-duration bonds were the top performing investment and the largest contributor to performance. The model is now indicating interest rate stability. Therefore, MAAX will continue to benefit from the higher yields it is accumulating from its long-duration bonds.

    Below is the strategy’s average asset allocation mix in April:

    VanEck Vectors Muni Allocation ETF — April 2021 Allocation

    VanEck Vectors Muni Allocation ETF - April 2021 Allocation

    Source: VanEck, FactSet Research Systems

    Last month, bonds with longer durations performed the best. The chart below illustrates that long-duration investment grade, high yield and intermediate investment grade were the top performers and largest contributors to performance.

    VanEck Vectors Muni Allocation ETF — April 2021 Total Return

    VanEck Vectors Muni Allocation ETF - April 2021 Total Return

    Source: VanEck, FactSet Research Systems

    High yield bonds continued to perform well because of their economic sensitivity, the flurry of positive economic data points and the positive economic outlook of the markets. The chart below demonstrates that, as expected, within high yield, longer-duration bonds outperformed shorter-duration bonds.

    VanEck Vectors Muni Allocation ETF — April 2021 High Yield Return

    VanEck Vectors Muni Allocation ETF - April 2021 High Yield Return

    Source: VanEck, FactSet Research Systems


    Average Annual Total Returns (%) as of April 30, 2021
      1 Mo YTD 1 Yr Life
    (05/15/19)
    MAAX (NAV) 1.10 0.99 11.70 2.45
    MAAX (Share Price) 1.32 1.00 12.41 2.46
    Bloomberg Barclays
    Municipal Bond Index*
    0.84 0.48 7.75 4.52
    Average Annual Total Returns (%) as of March 31, 2021
      1 Mo YTD 1 Yr Life
    (05/15/19)
    MAAX (NAV) 0.74 -0.11 10.15 1.96
    MAAX (Share Price) 0.66 -0.32 8.81 1.85
    Bloomberg Barclays
    Municipal Bond Index*
    0.62 -0.35 5.51 4.25

    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.

    *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.

    Muni Risk Factors

    As of now, MAAX is maintaining its allocation to both long duration and high yield bonds. The model indicates the risk in high yield, with a score of 0, to be low. However the duration risk, with a score of 33, remains elevated.

    Duration Total Risk Score

    Duration Total Risk Score

    The primary cause of elevated duration is a result of the composite of key interest rates trending upwards, indicating that we are in a rising rate regime. Additionally, the relative price action between longer- and shorter-duration muni bonds, even after last month’s rally, still supports shorter-duration bonds.

    Duration Trend Risk Score

    Duration Trend Risk Score

    However, as both the charts below suggest, there has been significant stability in the volatility of interest rates and mean reversion in historical cross-asset relationships. Therefore, it is likely that interest rates will behave in an orderly fashion in the near-term. This provides MAAX the opportunity to benefit from the higher yields associated with longer-duration bonds.

    Duration Volatility Risk Score

    Duration Volatility Risk Score

    Duration Mean Reversion Risk Score

    Duration Mean Reversion Risk Score

    The chart below demonstrates the current, previous months and recent shifts in MAAX’s asset allocation. As you can see, there were no allocation shifts in the beginning of May.

    VanEck Vectors Muni Allocation ETF — April and May Allocations

    VanEck Vectors Muni Allocation ETF - April and May Allocation

    To conclude, duration risk is elevated and some indicators are pointing to higher rates. However, the preponderance of the indicators point to a period of near-term stabilization. If rates continue to rise, it is expected to be orderly and gradual. If this changes, as always, we are prepared to react accordingly.

    IMPORTANT DISCLOSURES

    This content is published in the United States for residents of specified countries. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this content. Nothing in this content should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.

    An investment in the Funds may be subject to risks which include, fund of funds risk, high portfolio turnover, model and data risks, management, operational, authorized participant concentration and absence of prior active market risks, trading issues, market, fund shares trading, premium/discount and liquidity of fund shares and non-diversified risks. The funds may be subject to following risks as a result of investing in Exchange Traded Products including municipal securities, credit, high yield securities, tax, interest rate, call, state concentration and sector concentration risks. Municipal bonds may be less liquid than taxable bonds. There is no guarantee that a Funds’ income will be exempt from federal, state or local income taxes, and changes in those tax rates or in alternative minimum tax (AMT) rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. Capital gains, if any, are subject to capital gains tax. A portion of the dividends you receive may be subject to AMT. For a more complete description of these and other risks, please refer to each Fund’s prospectus.

    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.

    The VanEck Vectors ETFs are not sponsored by, endorsed, sold or promoted by Bloomberg or Barclays and neither Bloomberg nor Barclays makes any representation regarding the advisability of investing in them. The only relationship to the Adviser with respect to the VanEck Vectors ETFs is the licensing of certain trademarks and trade names of Bloomberg and Barclays and the BLOOMBERG BARCLAYS INDICES that are determined, composed and calculated by Bloomberg without regard to the Adviser or any investor in the VanEck Vectors ETFs.

    Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.

  • Authored by

    David Schassler
    Portfolio Manager and Head of Portfolio and Quantitative Investment Solutions, VanEck