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  • Municipal Bonds

    MAAX Remains Bullish While Becoming More Diversified

    David Schassler, Portfolio Manager and Head of Portfolio and Quantitative Investment Solutions, VanEck
    August 12, 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) had a NAV total return 2.12% vs. 1.68% for its benchmark for the month.

    July was yet another strong month for high yield bonds. MAAX’s exposure to high yield, through investments in both the VanEck Vectors® High-Yield Municipal Index ETF (HYD®) and the VanEck Vectors® Short High-Yield Municipal Index ETF (SHYD®), was the largest contributor to performance. HYD returned 2.40% and SHYD returned 2.51% (both based on market price). Within the universe of potential holdings, short-term investment grade municipals lagged with a market price return of 0.62%. Fortunately, MAAX did not have an allocation to this segment of the municipal bond market in July.

    Average Annual Total Returns (%) as of July 31, 2020
      1 Mo YTD 1 Year Life
    (05/15/19)
    MAAX (NAV) 2.12 -1.92 -0.14 1.24
    MAAX (Share Price) 1.76 -2.26 -0.51 1.01
    Bloomberg Barclays
    Municipal Bond Index
    1.68 3.80 5.36 5.79
    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.


    At the beginning of August, we adjusted the portfolio to improve performance by increasing diversification, while maintaining the overall risk and return profile of the strategy. Another benefit is that these adjustments will reduce portfolio turnover going forward. This is expected to reduce the costs associated with trading.

    MAAX is a systematic municipal allocation strategy that increases and decreases the riskiness of the portfolio depending on the risks measured within the municipal bond market. The four different risk scenarios are illustrated below:

        Higher Credit/Higher
    Duration
    Lower Credit/Higher
    Duration
    Higher Credit/Lower
    Duration
    Lower Credit/Lower
    Duration
    HYD   40% 0% 20% 0%
    ITM   20% 40% 0% 0%
    MLN   30% 50% 0% 0%
    SHYD   10% 0% 10% 0%
    SMB   0% 10% 70% 100%
    TOTAL   100% 100% 100% 100%

    Going forward, MAAX will now be more diversified in each of the four different risk scenarios. The allocations, based on each risk scenario, are shown below:

        Higher Credit/Higher
    Duration
    Lower Credit/Higher
    Duration
    Higher Credit/Lower
    Duration
    Lower Credit/Lower
    Duration
    HYD   30% 10% 30% 10%
    ITM   30% 50% 30% 50%
    MLN   35% 35% 15% 15%
    SHYD   5% 5% 5% 5%
    SMB   0% 0% 20% 20%
    TOTAL   100% 100% 100% 100%

    Muni Risk Factors

    The model that determines the allocations for MAAX considers this a stable risk regime as it relates to the two key risks that municipal bond investors take: 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. As you can see in the charts below, the risk scores for both credit and duration remain low for the second month in a row.

    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.

    Credit Total Risk Score

    Credit Total Risk Score

    Duration Total Risk Score

    Duration Total Risk Score

    The municipal bond market continues to recover from the chaos experienced in March, and MAAX continues to benefit from the recovery. This is now the third month in a row that MAAX has outperformed its benchmark. Based on the bullish readings from the indicators, and the fact that high yield has not yet fully recovered from pre-crisis levels, it is our expectation that there is still more upside. Further, the adjustments made to the allocations will result in additional diversification for MAAX.

    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.