High Yield Tax-Exempt Municipal Bonds Continue to Shine
Jim Colby, Portfolio Manager and Strategist, Municipal Bonds
May 29, 2019
For the last four years now, we have been extolling the virtues of high-yield tax-exempt municipal bonds and we continue to assert their intrinsic values! High yield still provides investors with attractive returns.
With both muni funds and ETFs recording the best start to a year, in terms of inflows, since data were first recorded in 1992, high yield tax-exempt municipal bonds in particular have been popular, especially, we believe, amongst individual investors. With the addition of one recent driver, the reasons why have remained consistent and multi-layered.
Here are the core reasons:
Municipal bonds, in general, continue both to display low volatility and boast strong credit quality.
High-yield tax-exempt municipal bonds, in particular, continue to boast a low default experience with high taxable equivalent returns.
Continuing low muni bond issuance combined with strong demand has led to enhanced performance.
Following the uncertainties of 2017 and 2018 around U.S. tax reform, further clarity around changes to the state and local tax (SALT) deduction has highlighted tax-exempt municipal bonds (especially high yield tax-exempt municipal bonds) as “tasty” choices for investors.
The tax-exempt status of high-yield municipal bonds provides a compelling risk/reward profile. Returns in other asset classes may have been attractive, but they come with both headline risk and volatility.
High-Yield Municipal Bond Taxable-Equivalent Returns
Index performance is not illustrative of VanEck Vectors ETF performance. Fund performance available at www.vaneck.com.
Source: FactSet. Data as of 3/31/2019. For illustrative purposes only. See asset class index definitions below.
The strong results for muni investors, and especially high yield muni investors, in the first quarter of 2019 are not only welcome, but also an affirmation of how important municipal bonds are to the core strategy of constructing an individual portfolio.
VanEck Vectors® High-Yield Municipal Index ETF (HYD®) offers investors access to municipal high yield bonds in the largest U.S.-listed high yield municipal bond ETF in terms of asset size, as well as the most liquid in terms of trading volume and tight bid/ask spreads.
Taxable-equivalent return represents the return a taxable bond would have to earn in order to match–after federal taxes–the return available on a tax-exempt municipal bond (excluding AMT). Municipal bonds may be subject to state and local taxes as well as to federal taxes on gains and may be subject to alternative minimum tax. The chart displays the returns of the Bloomberg Barclays Municipal Bond Index on a tax-equivalent return basis and compares such returns to other asset classes as represented by the indexes described at the end of this presentation. Fixed income investments have interest rate risk, which refers to the risk that bond prices generally fall as interest rates rise and vice versa. U.S. government bonds are guaranteed by the full faith and credit of the United States government. Municipal, corporate, agency and mortgage backed bonds are not guaranteed by the full faith and credit of the United States and carry the credit risk of the issuer. Municipal bonds are exempt from federal taxes and often state and local taxes. U.S. Treasuries are exempt from state and local taxes, but subject to federal taxes. Other securities listed are subject to federal, state and local taxes. Prices of equity securities change in response to many factors, including the historical and prospective earnings of the issuer, the value of its assets, general economic conditions, interest rates, investor perceptions and market liquidity. Prices of bonds change in response to factors such as interest rates and issuer’s credit worthiness, among others. Investing in smaller companies involves risks not associated with investing in more established companies such as business risk, stock price fluctuations and illiquidity. Standard deviation is the statistical measure of the historical volatility of a portfolio.
Historical information is not indicative of future results; current data may differ from data quoted. The listed indices are unmanaged and are not securities in which an investment can be made.
Municipal High Yield: Bloomberg Barclays Municipal High Yield Bond Index includes below investment-grade tax-exempt bond market. U.S. Floating Rate Notes: Bloomberg Barclays US Floating Rate Notes (<5 Y) Index consists of debt instruments that pay a variable coupon rate, a majority of which are based on the 3-month LIBOR, with a fixed spread, and may include U.S. registered, dollar denominated bonds of non-U.S. corporations, governments and supranational entities. U.S. Corp High Yield: Bloomberg Barclays U.S. Corporate High-Yield Bond Index includes below investment-grade corporate debt from U.S. issuers. Municipals: 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. U.S. Treasuries: Bloomberg Barclays U.S. Treasury Index includes public obligations of the U.S. Treasury. U.S. Aggregate: Bloomberg Barclays U.S. Aggregate Bond Index includes government and corporate securities, mortgage pass-through securities, and asset-backed securities. Global Aggregate: Bloomberg Barclays Global Aggregate Bond Index includes Eurodollar and Euro-Yen corporate bonds, Canadian government, agency and corporate securities, and USD investment grade 144A securities. U.S. Corporates: Bloomberg Barclays Corporate Bond Index includes taxable corporate debt from U.S. issuers. EM USD Sovereigns: Bloomberg Barclays EM USD Government Bond Index includes USD denominated government debt from emerging markets issuers. EM Local Sovereigns: Bloomberg Barclays EM Local Currency Government Bond Index includes local currency denominated government debt from emerging markets issuers.
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Municipal bonds are subject to risks related to litigation, legislation, political change, conditions in underlying sectors or in local business communities and economies, bankruptcy or other changes in the issuer’s financial condition, and/or the discontinuance of taxes supporting the project or assets or the inability to collect revenues for the project or from the assets. Bonds and bond funds will decrease in value as interest rates rise. Additional risks include credit, interest rate, call, reinvestment, tax, market and lease obligation risk. High-yield municipal bonds are subject to greater risk of loss of income and principal than higher-rated securities, and are likely to be more sensitive to adverse economic changes or individual municipal developments than those of higher-rated securities. Municipal bonds may be less liquid than taxable bonds.
The income generated from some types of municipal bonds may be subject to state and local taxes as well as to federal taxes on capital gains and may also be subject to alternative minimum tax.
Diversification does not assure a profit or protect against loss.
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 a fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
Portfolio Manager and Strategist, Municipal Bonds
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