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  • Municipal Bonds

    MAAX Cuts Duration as Bond Yields Surge

    David Schassler, Portfolio Manager and Head of Portfolio and Quantitative Investment Solutions, VanEck
    March 11, 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 -2.14% versus -1.59% for the Bloomberg Barclays Municipal Bond Index. The model that informs MAAX’s allocations is now identifying higher interest rate risk. This results from the rapid rise in interest rates, increased correlations between bond prices and stock prices and an uptick in the volatility of interest rates. MAAX responded by reducing its interest rate sensitivity. It sold 10% of long duration bonds and re-allocated the proceeds to short duration bonds.

    Interest rates continued to rise at a rapid rate in February. Since the beginning of the year, the yield on the U.S. 10-Year Treasury note increased from 0.91% to more than 1.50%. This put downward pressure on municipal bonds, particularly those with longer durations. Interest rates are rising due to unprecedented monetary and fiscal policy support combined with the expectations of higher economic growth. The chart below illustrates the rise in interest rates:

    10Y Treasury Yield

    10Y Treasury Yield

    Source: U.S. Treasury

    MAAX underperformed last month because it had more exposure to bonds with higher interest rate sensitivity than the benchmark. MAAX’s February allocation mix is shown below:

    VanEck Vectors Muni Allocation ETF — February 2021 Allocation

    VanEck Vectors Muni Allocation ETF - February 2021 Allocation

    Source: VanEck, FactSet Research Systems

    The largest detractors from performance were long IG bonds, which returned -2.79, and intermediate IG, which returned -2%.

    VanEck Vectors Muni Allocation ETF — February 2021 Total Return

    VanEck Vectors Muni Allocation ETF - February 2021 Total Return

    Source: VanEck, FactSet Research Systems

    The high yield investments in the fund were less negatively impacted by rising interest rates. This is because high yield bonds are less sensitive to interest rates and more sensitive to the economic outlook. Remember, the strong economic outlook was the root cause of the surge in interest rates.

    The chart below illustrates the performance of the fund’s high yield allocations. As you can see, the high yield holdings are diversified across both short and intermediate duration debt. The short HY bonds outperformed the intermediate HY bonds by 0.26%.

    VanEck Vectors Muni Allocation ETF — February 2021 High Yield Return

    VanEck Vectors Muni Allocation ETF - February 2021 High Yield Return

    Source: VanEck, FactSet Research Systems


    Average Annual Total Returns (%) as of February 28, 2021
      1 Mo YTD 1 Yr Life
    (05/15/19)
    MAAX (NAV) -2.14 -0.84 -3.88 1.63
    MAAX (Share Price) -2.21 -0.98 -3.99 1.57
    Bloomberg Barclays
    Municipal Bond Index
    -1.59 -0.96 1.06 4.11
    Average Annual Total Returns (%) as of December 31, 2020
      1 Mo YTD 1 Yr Life
    (05/15/19)
    MAAX (NAV) 1.00 0.32 0.32 2.33
    MAAX (Share Price) 1.12 0.26 0.26 2.34
    Bloomberg Barclays
    Municipal Bond Index
    0.61 5.21 5.21 5.15

    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 reduced its exposure to long duration bonds based on an elevated duration risk score. This score provides us with a warning that interest rate risk is high and that a reduction in duration risk is warranted. The duration risk score was 41 at the beginning of the month, but has since risen to over 60.

    Duration Total Risk Score

    Duration Total Risk Score

    The risks driving that elevated risk score are:

    1. Interest rates are rising significantly. The chart below measures price weakness across our interest rate trend composite. The current score, at 50, is signaling elevated risk. This score reflects price trend weakness across long duration muni bond prices and rising interest rates globally.

    Duration Trend Risk Score

    Duration Trend Risk Score
    1. The duration mean reversion risk score was 32 at month-end and has since risen to 66. We monitor correlations between interest rates and other major asset classes. Currently, rising interest rates are pushing down equities. This confirms the severity of the interest rate move.

    Duration Mean Reversion Risk Score

    Duration Mean Reversion Risk Score
    1. And, lastly, the volatility of interest rates is climbing. The duration volatility risk score was 17 at month-end and has since risen to 25. This is yet another warning that interest rate risk is elevated.

    Duration Volatility Risk Score

    Duration Volatility Risk Score

    Moving on to 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 months and recent shifts in MAAX’s asset allocation. As previously noted, you can see that we reduced the fund’s interest rate sensitivity. This was accomplished by reducing its exposure to long-term IG bonds by 10% and re-allocating it to short IG bonds.

    VanEck Vectors Muni Allocation ETF — February and March Allocation

    VanEck Vectors Muni Allocation ETF — February and March Allocation

    Source: VanEck, FactSet Research Systems

    We will continue to closely monitor the risk signals to best navigate this challenging interest rate environment. Interest rates have moved significantly in a very short period of time. Typically, large and rapid interest rate moves are mean-reverting. Therefore, this may eventually offer a near-term opportunity to purchase back those longer duration bonds at lower prices in the future.

    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