Strong Demand, Not Enough Supply Continues to Drive MunisDavid Schassler, Portfolio Manager and Head of Portfolio and Quantitative Investment Solutions, VanEckDecember 18, 2020
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.
The VanEck Vectors® Muni Allocation ETF (“MAAX”) had a NAV total return +2.01% vs. +1.51% for its benchmark for the month. The 30-Day SEC Yield for MAAX is 2.84% and the taxable equivalent 30-Day SEC yield, assuming the highest federal tax rate of 37%, is 4.51% as of November month-end.
November was a great month for MAAX. Municipal bonds, particularly those with more credit and duration risk, continued to perform due to strong demand for tax-exempt yield. The top performing positions in MAAX had exposure to both high yield and long duration bonds. The VanEck Vectors® High Yield Muni ETF (HYD®), a 30% allocation within MAAX, and the VanEck Vectors® Short High Yield Muni ETF (SHYD®), a 5% allocation within MAAX, share price returned +2.78% and +2.55%, respectively. The VanEck Vectors® Long Muni ETF (MLN®), a 35% allocation within MAAX, returned +2.24%.
Average Annual Total Returns (%) as of November 30, 2020 1 Mo† YTD† 1 Year Life (05/15/19) MAAX (NAV) 2.01 -0.68 -0.65 1.80 MAAX (Share Price) 2.09 -0.85 -0.79 1.73 Bloomberg Barclays
Municipal Bond Index*
1.51 4.58 4.89 5.02 Average Annual Total Returns (%) as of September 30, 2020 1 Mo† YTD† 1 Year Life (05/15/19) MAAX (NAV) -0.24 -2.45 -2.08 0.69 MAAX (Share Price) -0.08 -2.35 -1.93 0.83 Bloomberg Barclays
Municipal Bond Index*
0.02 3.33 4.09 4.74
†Returns less than a year are not annualized.
Expenses: Gross 0.38%; Net 0.38%. 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.
An interesting observation has been the recent disconnect between muni and Treasury yields. Treasury yields have been rising due to the optimism about the future of the economy. However, muni yields have not been following, due to the strong demand for tax-exempt income. Below is a chart of the weekly yield change, in basis points, of AAA-rated muni bonds compared to Treasury bonds.
In December, MAAX continues to seek yield with its 35% allocation to high yield, 35% allocation to investment grade long duration and 30% allocation to intermediate-term investment grade. We believe that this positioning allows MAAX to continue to balance both the risks and rewards of the municipal bond market.
The next section highlights the risk factors that led to this positioning.
Muni Risk Factors
The model that determines the allocations for MAAX considers this to be a stable risk regime as it relates to the two key risks taken by municipal bond investors: credit and duration. It measures risk via price levels, volatility and historical relationships. Risk is scored from 0 to 100. A score of 50 or lower implies that risk is low and a score of 50 or higher implies that risk is high.
The risk score for credit remains 0. All of the credit indicators in the model, which are designed to measure periods of heightened credit risk, remain bullish. This suggests that there is likely to be continued near-term stability in the credit markets.
Credit Total Risk Score
The risk score for duration declined from 33 to 0. The risk score declined because of improving price momentum in long duration bonds.
Duration Total Risk Score
The indicators in our model continue to point towards stability within the municipal bond market. Therefore, MAAX will continue to be positioned overweight both credit and duration relative to its benchmark. This positioning is expected to allow MAAX to continue to take advantage of the relative attractiveness, on an after-tax basis, of non-taxable versus taxable bonds.
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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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