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MAAX Reinvests in High YieldDavid Schassler, Portfolio Manager and Head of Portfolio and Quantitative Investment Solutions, VanEckJune 11, 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.
The VanEck Vectors Municipal Allocation ETF (MAAX) returned 4.17% vs. 3.18% for its benchmark as of month end.
MAAX performed well in May. At the beginning of the month, it pivoted from ultra-conservative, with a portfolio of exclusively high quality short-duration bonds, through its investment in the VanEck Vectors AMT-Free Short Municipal Index ETF (SMB), to a high quality portfolio of longer duration bonds. It turned out to be the right call.
Prior to rebalance, MAAX held a 50% allocation to the VanEck Vectors AMT-Free Long Municipal ETF (MLN), a 40% allocation to the VanEck Vectors AMT-Free Intermediate Municipal ETF (ITM) and a 10% allocation to SMB. In May, these funds returned 5.88%, 5.78% and 2.24% (all based on market price), respectively. Over the month, the returns of ETFs that invest in longer-duration, high-quality bonds were impressive, keeping pace with those of ETFs that invest in high-yield municipals, such as the VanEck Vectors High-Yield Municipal Index ETF (HYD), with a market price return of 5.93%, but with much less credit risk.
In June, MAAX re-invested in ETFs with exposure to high-yield municipal bonds. This offers MAAX the potential ability to significantly outperform its benchmark in the near term because of the current distressed pricing in high-yield municipal bonds. At the beginning of June, HYD was priced -12.78% below the high achieved on February 26, offering a 30-day SEC yield of 4.88%. In order to make the yield comparable to taxable fixed income investments, the tax equivalent yield (based on investors in the highest tax bracket) is 7.6%! That is significantly higher than the 5.93% yield currently being offered by popular corporate high yield ETFs.
MAAX now holds a 40% position in HYD, a 30% position in MLN a 20% position in the ITM and a 10% position in VanEck Vectors Short High-Yield Municipal Index ETF (SHYD).
The next section of this commentary explains why.
Average Annual Total Returns (%) as of May 31, 2020 1 Mo† YTD† 1 Year Life (05/15/19) MAAX (NAV) 4.17 -5.51 -2.83 -2.12 MAAX (Share Price) 4.95 -5.46 -2.78 -2.00 Bloomberg Barclays
Municipal Bond Index*
3.18 1.24 3.98 4.24
Average Annual Total Returns (%) as of March 31, 2020 1 Mo† YTD† 1 Year Life (05/15/19) MAAX (NAV) -12.09 -9.03 - -5.85 MAAX (Share Price) -11.18 -8.15 - -4.87 Bloomberg Barclays
Municipal Bond Index*
-3.63 -0.63 3.85 2.50
†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 that this is an attractive time to invest in high yield municipal bonds. 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 credit risk score recently declined from 100 to 33 based on lower volatility and mean reversion.
Credit Total Risk Score
There was a major decline in the volatilities of both the key benchmark U.S. 10-year Treasury bond yield and high yield municipal bonds. In addition, investment grade municipal bond yields now lie within a more reasonable range of yields on U.S. Treasury bonds, and AAA municipal bond yields are trading within a more normalized range of the broad municipal bond market.
These indicators signal that the market is healing from the wounds inflicted in March and this is what the model believes to be a good re-entry point for investment in high yield municipal bonds.
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.
Authored byDavid Schassler
Portfolio Manager and Head of Portfolio and Quantitative Investment Solutions, VanEck