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MAAX Plays Defense

October 25, 2021

Read Time 4 MIN

 

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.

Overview

For the month of September, the VanEck Muni Allocation ETF (“MAAX”) had a NAV total return of negative 1.44% versus negative 0.72% for its benchmark, the Bloomberg Barclays Municipal Bond Index. Over the past 12 months, MAAX is up 4.31% versus 2.63% for its benchmark. MAAX’s taxable equivalent 30-Day SEC yield, based on a 37% federal tax rate, was 4.48% as of September 30, 2021.

Month-End/Quarter-End Total Returns (%) as of September 30, 2021
  1 Mo YTD 1 Yr Life (05/15/19)
MAAX (NAV) -1.44 1.43 4.31 2.20
MAAX (Share Price) -1.33 1.65 4.37 2.30
Bloomberg Barclays
Municipal Bond Index*
-0.72 0.79 2.63 3.85

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.

Municipal bonds, across the board, were under pressure last month. The largest detractors from performance were holdings with the longest durations, such as high yield, closed-end funds and long-duration investment grade bonds. The higher yields from these investments helped to cushion the price declines, but did not offset them completely.

The chart below illustrates the performance and contribution to performance for each segment of the portfolio during the month of September:

VanEck Muni Allocation ETF - Return September 2021

VanEck Muni Allocation ETF - Return September 2021

Source: Factset

September was all about interest rates. The month started with the U.S. 10-Year Treasury note yielding 1.31% and ended with it yielding 1.49%. Here we are now, in October, and that rate is hovering around 1.60%. Let’s explore what has driven rates higher recently and where we think rates are going.

There were two notable forces pushing interest rates higher: the first, the anticipated U.S. Federal Reserve (Fed) taper, and the second, high inflation. The Fed has been purchasing $120 billion in Treasuries and mortgage-backed securities each month to support the economy to help dig it out of the hole opened up by the pandemic. The Fed may begin slowing the rate of those purchases as soon as November, which would put upward pressure on yields. The other force pushing yields up is inflation. The perception of transitory inflation has helped to keep yields muted, but persistently high inflation prints is challenging that narrative.

On October 14, MAAX increased its credit quality and reduced its overall risk exposure due to falling bond prices and widening credit spreads. One of our momentum signals, which compares the performance of high yield to investment grade bonds, began to warn of trouble brewing on September 29. This was further confirmed by falling price trends on high yield bonds on October 4. Then, on October 13, the model verified that credit spreads were widening.

The chart below illustrates the credit risk score, which turned bearish once the risk score reached 50.

Credit Total Risk Score

VanEck Muni Allocation ETF - Credit Total Risk Score

Source: VanEck

MAAX reduced its exposure to high yield by 15% and to closed-end bond funds by 5% and re-allocated the proceeds to intermediate-duration investment grade bonds.

The chart below illustrates current weightings and recent changes:

VanEck Muni Allocation ETF - Current Weights and Allocation Shifts

Source: VanEck as of 10/18/2021

If rates continue higher, which is certainly a possibility, then it is plausible that we may see more significant market stress. At that time, in our view, it would be appropriate to take further defensive actions. At this point, however, we believe that the current allocation leaves the fund well positioned to balance both the risks and rewards in the municipal bond market.

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 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 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 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.

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