The VanEck Vectors® Municipal Allocation ETF (“MAAX”) market price returned -11.18% vs. -3.63% for its benchmark for the month.
The current market environment is unique in basically every way possible. We are simultaneously battling a health crisis and a financial crisis. This has caused the fastest major market decline, from peak-to-trough, in the history of the U.S. stock market. The risk in the market is also being seen across other asset classes. As of March 31, on a year-to-date basis, the S&P 500® Index was down 19.60%, the Bloomberg Commodity Index was down 23.29% and the Bloomberg Barclays Municipal Bond Index was down 0.63%. The price of oil is plunging, down 66.46% year-to-date, due to a price war between Saudi Arabia and Russia coupled with a demand shock resulting from the coronavirus.
MAAX is an ETF that invests in other ETFs. Therefore, its performance is based on prices of the ETFs in which it invests. In mid-march, VanEck Vectors High-Yield Municipal Index ETF (HYD), which is the largest of its kind in the market, traded at steep discounts to its net asset value (“NAV”). This phenomenon was not isolated to municipal ETFs with exposure to bonds with lower credit qualities. VanEck Vectors AMT-Free Intermediate Municipal Index ETF (ITM) also traded at a pronounced discount during peak market stress. Nor was this unique to the municipal bond market. The Vanguard Total Bond Market ETF, a $50 billion1 product that invests in U.S. taxable investment grade bonds, also traded at a steep discount to its NAV. Since March, the markets have calmed significantly and many of these discounts have disappeared.
In March, MAAX’s performance was hurt by large losses in HYD and VanEck Vectors Short High-Yield Municipal Index ETF (SHYD), which had a market price return of -20.11% and -12.03%, respectively. But it was not only the lower investment grade investments that detracted from performance. VanEck Vectors AMT-Free Long Municipal Index ETF (MLN) and ITM had market price returns of -6.27% and -4.97%, respectively.
With the change in its allocations, MAAX assumed its most defensive posture in April. It transitioned from its most aggressive positioning (overweight municipals with both lower credit qualities and longer durations in an effort to collect higher yields) to seeking downside protection in a portfolio of low duration and investment-grade municipal bonds.
Ideally, this change in positioning would have happened last month. However, the rapidity of the price declines, on a scale which the world has never before experienced, would have made any tactical adjustments prior to the decline unrealistic.
As of now, and for good reason, the model that drives the Municipal Allocation Strategy is wary of issues with low credit quality and bonds with long durations. The following section of the commentary explains why.
Average Annual Total Returns (%) as of March 31, 2020
MAAX (Share Price)
Bloomberg Barclays Municipal Bond Index*
Average Annual Total Returns (%) as of March 31, 2020
MAAX (Share Price)
Bloomberg Barclays Municipal Bond Index*
†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. ETF returns assume that distributions have been reinvested in the Fund at “Net Asset Value” (NAV). NAV 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 Vectors 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.
Muni Risk Factors
The model indicates a period of high risk in the municipal fixed income market. This results from 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 current credit risk score is 100! This extreme score reflects falling prices, high volatility and various fixed income spread measures that indicate a period of near-term instability in assets with credit risk.
Credit Total Risk Score
The duration risk score is now 66, thereby exceeding the risk score of 50 that is required to exit long-dated bonds. The duration risk is elevated because the prices of bonds with longer durations are falling and there is high volatility in long duration assets.
Duration Total Risk Score
The world changed very quickly. A little over a month ago we had record unemployment and both the longest economic expansion and bull market on record. Now, we are dealing with what is expected to be the fastest economic contraction on record. Getting defensive prior to this event may not have been realistic, but the model is surely measuring these risks now. The strategy is now working to protect its investors from any potential losses that may lie ahead.
1Source: Morningstar as of 3/31/2020.
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.
Fund shares are not individually redeemable and will be issued and redeemed at their NAV only through certain authorized broker-dealers in large, specified blocks of shares called "creation units" and otherwise can be bought and sold only through exchange trading. Shares may trade at a premium or discount to their NAV in the secondary market. You will incur brokerage expenses when trading Fund shares in the secondary market. Past performance is no guarantee of future results. Returns for actual Fund investments may differ from what is shown because of differences in timing, the amount invested, and fees and expenses.
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 prospectuscarefully before investing.
Portfolio Manager and Head of Portfolio and Quantitative Investment Solutions, VanEck
Web Access Notice: VanEck is committed to ensuring accessibility of its website for investors and potential investors, including those with disabilities. If you have difficulty accessing any feature or functionality on the VanEck website, please feel free to call us at 800.826.2333 or email us at email@example.com for assistance.
This website 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 website. Nothing on this website 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.
Investing involves risk, including possible loss of principal. An investor should carefully consider investment objectives, risks, charges and expenses carefully before investing. This and other information can be found in the appropriate regulatory documents made available for a specified country as designated in this website.
Van Eck Securities Corporation, Distributor 666 Third Avenue New York, NY 10017800.826.2333