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  • Municipal Bonds

    Rates Fall and Push Muni Prices Higher

    David Schassler, Portfolio Manager and Head of Portfolio and Quantitative Investment Solutions, VanEck
    February 21, 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”) is currently yielding 2.51% vs. 1.47% for its benchmark, the Bloomberg Barclays Municipal Bond Index as of January 31, 2020.1 MAAX returned 2.30% vs. 1.80% for its benchmark for the month.

    Risk re-emerged in the market and sent the prices of bonds up, especially those with longer durations.  Within MAAX, top performing positions were investments in the VanEck Vectors AMT-Free Long Municipal Index ETF with a return of 2.75%, the VanEck Vectors AMT-Free Intermediate Municipal Index ETF with a return of 2.47%, and the Intermediate VanEck Vectors High-Yield Municipal Index ETF with a return of 2.20%. Its bottom performing position in investment grade high yield short-duration bonds still returned an impressive 1.95%.

    MAAX’s allocations did not change in February. It remains overweight both credit and duration relative to its benchmark. This positioning allows MAAX to generate a significantly higher yield than that of its benchmark with the goal of de-risking the portfolio during periods of extreme risk.

    Average Annual Total Returns (%) as of January 31, 2020
      1 Mo† YTD† 1 Yr Life
    MAAX (NAV) 2.30 2.30 -- 5.88
    MAAX (Share Price) 2.31 2.31 -- 5.96
    Bloomberg Barclays
    Municipal Bond Index
    1.80 1.80 8.65 5.00

    Average Annual Total Returns (%) as of December 31, 2019
      1 Mo† YTD† 1 Yr Life
    MAAX (NAV) 0.03 -- -- 3.49
    MAAX (Share Price) 0.06 -- -- 3.57
    Bloomberg Barclays
    Municipal Bond Index
    0.31 7.54 7.54 3.15

    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.

    Muni Risk Factors

    Overall, the model indicates a period of low 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 below 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 0. Therefore, MAAX will maintain its overweight credit positioning.

    Credit Total Risk Score

    Credit Total Risk Score

    The duration risk score changed from 25 to 0. A risk score of 50 is the critical level for the model to exit long-dated bonds.

    Duration Total Risk Score

    Duration Total Risk Score

    The duration risk score had been elevated since November of 2019, the result of synchronized rate increases across key global 10-year yields.  This placed downward pressure on bond prices. However, with the re-emergence of risk in the markets, this trend has reversed and pushed bond prices up.

    The chart below demonstrates that global rates are now falling. The blue line represents an average of 10-year yields across the U.S., Canada, Germany, France and Switzerland. The red line is a short-term moving average and the red line is a long-term moving average. The moving averages help us to determine the direction of the trend. Right now, the 10-year yield in France has once again dipped negative, while the negative yields in Switzerland and Germany deepened. 

    Global 10-Year Government Yields

    Global 10-Year Government Yields

    To conclude, MAAX’s model indicates a stable environment for municipal bonds. Therefore, it will remain overweight both credit and duration risk in pursuit of higher yields. MAAX will continue to monitor the risks and adjust its exposures as necessary. 


    1The 30-Day SEC Yield for MAAX was 3.06% as of 1/31/2020.

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    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.

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    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.

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