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Remaining Tactical in a Stable EnvironmentDavid Schassler, Portfolio Manager and Head of Portfolio and Quantitative Investment Solutions, VanEckDecember 11, 2019
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 2.87% vs. 1.81% for the Bloomberg Barclays Municipal Bond Index. In November, MAAX returned 0.18% vs. 0.25% for the Bloomberg Barclays Municipal Bond Index.
This past month, our view is that in muni-land the bonds with more credit risk made more money. In November, the VanEck Vectors High-Yield Municipal Index ETF (HYD) returned 0.47% and the VanEck Vectors Short High-Yield Municipal Index ETF (SHYD) returned 0.31%. The worst performing bonds were high in credit quality and longer in duration. The VanEck Vectors AMT-Free Long Municipal Index ETF (MLN) returned -0.06% and the VanEck Vectors AMT-Free Intermediate Municipal Index ETF (ITM) returned -0.08%. (For standardized performance for each fund, please click the following: HYD,SHYD, MLN and ITM.)
Average Annual Total Returns (%) as of November 30, 2019 1 Mo† YTD† 1 Year Life
MAAX (NAV) 0.18 - - 3.46 MAAX (Share Price) 0.25 - - 3.51 Bloomberg Barclays
Municipal Bond Index *
0.25 7.21 8.49 2.84 Average Annual Total Returns (%) as of September 30, 2019 1 Mo† YTD† 1 Year Life
MAAX (NAV) -0.77 - - 3.10 MAAX (Share Price) -0.74 - - 3.13 Bloomberg Barclays
Municipal Bond Index*
-0.80 6.75 8.55 2.40
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.
†Returns less than a year are not annualized.
Expenses: Gross 0.38%; Net 0.38%.
Muni Risk Factors
Overall, the model indicates a period of low risk in the municipal fixed income market. The model measures credit and duration risk independently. More specifically, the model measures risk by monitoring stability in price levels, volatility and historical relationships. Right now, each of these key metrics within the municipal credit market point to near-term price stability.
Risk is scored from 0 to 100. A score below 50 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
While duration risk is also low, there are signs that this may be changing. Recently, yields have been rising.10-year rates are up across major developed economies, including the U.S., Germany, France, Switzerland and Canada. This had been putting downward pressure on bond prices.
The current duration risk score is 25 and below our systemic risk threshold of 50, Therefore, MAAX will also maintain its overweight exposure to duration.
Duration Total Risk Score
The factors that determine the total level of both credit and duration risk are momentum, volatility and mean reversion. The scoring methodology works in the same way here. Scores below 50 are bullish and scores of 50 or higher are bearish.
The trend risk score is bullish for both credit and duration risk. However, the duration trend risk score has been rising lately because interest rates have been rising globally.
Credit Trend Risk Score
Duration Trend Risk Score
Volatility has recently subsided in the 10-YR U.S. Treasury Note. This is a key measure of risk because it gauges investor sentiment. This is a good sign for the municipal bond market and for other more risky assets. The current volatility risk score is 0 for both credit and duration.
Credit Volatility Risk Score
Duration Volatility Risk Score
The mean reversion risk score seeks to identify divergences in typical fixed income relationships. The score for both duration and credit mean reversion risk is 0. This is another risk metric that give us comfort in the model’s overweight positions in both credit and duration sensitive investments.
Credit Mean Reversion Risk Score
Duration Mean Reversion Risk Score
In summary, MAAX will remain overweight both credit and duration risk due to the low risk environment for municipal fixed income being measured by the model. The environment will continue to be monitored closely and MAAX’s exposures will be adjusted if the risk environment changes materially.
130-day SEC yield for MAAX was 3.23% (unsubsidized 0.21%) as of 10/31/19.
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 contain 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