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  • Municipal Bonds

    MAAX Adds to Duration as Bond Yields Attempt to Stabilize

    David Schassler, Portfolio Manager and Head of Portfolio and Quantitative Investment Solutions, VanEck
    April 15, 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 0.74% vs 0.62% for the Bloomberg Barclays Municipal Bond Index for March. MAAX’s taxable equivalent 30-Day SEC yield, based on a 37% federal tax rate, was 4.14% as of March 31, 2021.

    In late February, MAAX identified a higher interest rate risk. The Fund responded by reducing its interest rate sensitivity. It sold 10% of long duration bonds and re-allocated the proceeds to short duration bonds. The model effectively warned that higher interest rates were coming. The chart below illustrates the move in the yield of the 10-Year U.S. Treasury, which reached 1.74% last month. MAAX reduced duration when the yield was approximately 1.40%.

    10Y Treasury Yield

    10Y Treasury Yield

    Source: U.S. Treasury

    For April, MAAX reduced its exposure to short-duration bonds by 10% and re-allocated the proceeds to long-duration bonds. The Fund had reduced its exposure to interest rate risk in March due to negative price momentum in long-dated bonds, high volatility in rates and strong negative correlations between interest rates and other asset classes. However, much of that risk has since subsided, with more normalized volatility in interest rates and more typical correlations across other asset classes.

    Below is the strategy’s asset allocation mix in March:

    VanEck Vectors Muni Allocation ETF — March 2021 Allocation

    VanEck Vectors Muni Allocation ETF - March 2021 Allocation

    Source: VanEck, FactSet Research Systems

    In March, the largest contributor to performance was high yield, which returned +1.17% and the smallest contributor to performance was short duration investment grade, which returned +0.30%. Long-duration bonds outperformed short duration bonds by 0.43%, regardless of rising interest rates, because of high demand as investors prepare for higher taxes and look to take advantage of more attractively priced bonds. As a result, the tactical shift, although being correct on the direction and magnitude of interest rates rising, had a minimal impact on performance.

    VanEck Vectors Muni Allocation ETF — March 2021 Total Return

    VanEck Vectors Muni Allocation ETF – March 2021 Total Return

    Source: VanEck, FactSet Research Systems

    High yield was the top performer last month as optimism around the economic outlook continues. The most recent data point confirming the strength of the recovery was nonfarm payrolls, which surged by 916k in March,1 beating the estimate of 675k by a wide margin. The employment gains were largely in segments of the economy that are closely tied to the post-pandemic re-opening, such as hospitality and construction.

    The chart below illustrates the performance of the Fund’s high yield allocation. The aggregate high yield allocation returned +1.17%. This was led by intermediate high yield, with a return of +1.26%, and short-duration high yield, with a return of +0.68%.

    VanEck Vectors Muni Allocation ETF — March 2021 High Yield Return

    VanEck Vectors Muni Allocation ETF – March 2021 High Yield Return

    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
    Average Annual Total Returns (%) as of March 31, 2020
      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 reim¬bursements. Had the ETF incurred all expenses and fees, investment re¬turns 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

    MAAX increased its exposure to long-duration bonds based on a declining duration risk score. The indicators that drove this shift include:

    1. The duration mean reversion risk score, which was elevated very recently, began to ease. We monitor correlations between interest rates and other major asset classes. Rising interest rates were pushing down equities and this confirmed the severity of the interest rate move. That pattern is no longer present in the market, which is an indication that interest rates have stabilized.

    Duration Mean Reversion Risk Score

    Duration Mean Reversion Risk Score

    1. The volatility of interest rates has largely subsided. This is yet another indication that interest rates are stabilizing.

    Duration Volatility Risk Score

    Duration Volatility Risk Score

    In terms of credit, the risk score remains 0. The economic outlook remains favorable and is therefore keeping credit risk low.

    Credit Total Risk Score

    Credit Total Risk Score

    The chart below demonstrates the current, previous month and allocation shift in MAAX’s asset allocation. It highlights the increase in long duration bonds and decrease in short duration bonds.

    VanEck Vectors Muni Allocation ETF — March and April Allocation

    VanEck Vectors Muni Allocation ETF — March and April Allocation

    Source: VanEck, FactSet Research Systems

    Interest rates appear to have stabilized. It is expected, based on the indicators, that we will remain range-bound in the near-term. Typically, large and rapid interest rate moves are mean-reverting. Therefore, it is likely that interest rates could continue to fall. However, it would not be surprising if interest rates gradually increased from the current level, based on the uptick in economic activity. As always, we will continue to closely monitor the situation.

    IMPORTANT DISCLOSURES

    U.S. Bureau of Labor Statistics

    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