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  • Municipal Bonds

    MAAX Continues to Benefit from the Rebound

    David Schassler, Portfolio Manager and Head of Portfolio and Quantitative Investment Solutions, VanEck
    July 16, 2020
     

    The VanEck Vectors® Municipal 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 Municipal Allocation ETF (MAAX) posted a NAV total return of 1.64% vs. 0.82% for its benchmark for the month.

    June, just like May, was a good month for MAAX on both an absolute and relative basis. The municipal bond market staged another month of notable gains, specifically in issuances with lower credit qualities and longer durations. At the beginning of June, MAAX transitioned from being overweight high-quality, long-duration bonds to being overweight both long duration investment grade and non-investment grade bonds. This worked well as both long duration investment grade bonds, as represented by the VanEck Vectors AMT-Free Long Municipal ETF (MLN), returned +1.33%, and non-investment grade bonds, as represented by the VanEck Vectors High Yield Municipal Index ETF (HYD), returned +2.98% (both based on market price).

    In July, MAAX continues to hold a 40% position in HYD, a 30% position in MLN, a 20% position in the VanEck Vectors AMT-Free Intermediate Municipal ETF (ITM) and a 10% position in the VanEck Vectors Short High-Yield Municipal ETF (SHYD).

    The next section highlights the risk factors that led to this positioning.  

    Average Annual Total Returns (%) as of June 30, 2020
      1 Mo YTD 1 Year Life
    (05/15/19)
    MAAX (NAV) 1.64 -3.96 -1.63 -0.54
    MAAX (Share Price) 1.59 -3.95 -1.47 -0.47
    Bloomberg Barclays
    Municipal Bond Index
    0.82 2.08 4.45 4.69

    Average Annual Total Returns (%) as of June 30, 2020
      1 Mo YTD 1 Year Life
    (05/15/19)
    MAAX (NAV) 1.64 -3.96 -1.63 -0.54
    MAAX (Share Price) 1.59 -3.95 -1.47 -0.47
    Bloomberg Barclays
    Municipal Bond Index
    0.82 2.08 4.45 4.69

    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.

    Muni Risk Factors

    The model indicates that this is an attractive time to invest in high yield municipal bonds. This is based on measuring credit and duration risk using stability in 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 credit risk score recently declined from 33 to 0 based on the recovery of price trends in high yield and the relative near-term outperformance of high yield to more conservative municipal bonds.

    Credit Total Risk Score

    Credit Total Risk Score

    The duration risk score recently declined from 33 to 0 based on the recovery of price trends of long duration municipal bonds and the relative near-term outperformance of long duration to short duration municipal bonds.

    Duration Total Risk Score

    Duration Total Risk Score

    July will be second month that MAAX has re-invested in high yield municipal bond ETFs. We still believe that HYD offers upside potential from here. HYD is priced 10% below the high achieved on February 26, 2020 and as of June 30 had a 30-day SEC yield of 4.31%. That yield is not too shabby considering that 10-year U.S. Treasury bonds are currently yielding approximately 0.63% according to Barclays. Of course, U.S. Treasuries to high yield municipal bonds is far from an apples-to-apples comparison. COVID-19 has left municipalities facing significant headwinds due to higher expenditures and lower revenues. MAAX will continue to balance the opportunities and risks by remaining well diversified and nimble to react to changing risk regimes. 

    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.