Holding Steady Amid Rising Risks in Municipal BondsDavid Schassler, Portfolio Manager and Head of Portfolio and Quantitative Investment Solutions, VanEckSeptember 19, 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 2.73% vs. 1.65% for the Bloomberg Barclays Municipal Bond Index, as of August 30, 2019. August was a big month for MAAX. It returned 2.11% vs. 1.58% for the Bloomberg Barclays Municipal Bond Index. The outperformance largely came from fears of a recession that sent long-term yields down and, concurrently, prices up. The top performing position was in long-term bonds. The VanEck Vectors AMT-Free Long Municipal Index ETF (MLN) returned 2.93%. MAAX’s exposure to shorter duration investments, such as its holding in the VanEck Vectors Short High-Yield Municipal Index ETF (SHYD), lagged its other investments with a return of 1.36%.
Average Annual Total Returns (%) as of August 31, 2019 1 Mo† YTD† 1 Year Life
MAAX (NAV) 2.22 - - 3.90 MAAX (Share Price) 2.11 - - 3.90 Bloomberg Barclays
Municipal Bond Index
1.58 7.61 8.72 3.22
Average Annual Total Returns (%) as of June 30, 2019 1 Mo† YTD† 1 Year Life
MAAX (NAV) 0.40 - - 1.04 MAAX (Share Price) 0.24 - - - Bloomberg Barclays
Municipal Bond Index
0.37 5.09 6.71 0.81
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 reim¬bursements. Had the ETF incurred all expenses and fees, investment re¬turns 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 0.65%; Net 0.36%. Expenses are capped contractually at 0.08% through February 1, 2020. Expenses are based on estimated amounts for the current fiscal year. Cap exclude certain expenses, such as interest, acquired fund fees and expenses, and trading expenses.
Muni Risk Factors
Risks have been modestly rising in the municipal market, but they are not yet at a level which would cause MAAX to reduce its credit and/or duration exposure. Heightened levels of risk is being measured in the volatility of the 10-year U.S. Treasury Note and the ratio of muni yields to Treasury yields. For now, MAAX remains overweight both credit and duration, and it will maintain those exposures until additional risks arise.
In aggregate, the model is measuring elevated levels of credit and duration risk. The 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 25 and the current duration risk score is 25. Since both of these scores are below our systemic risk threshold of 50, MAAX will maintain its overweight credit and duration risk positioning.
Credit Total Risk Score
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 the same here. Scores below 50 are bullish and scores 50 or higher are bearish. The trend risk score is bullish for both credit and duration risk given the recent strength in bond prices.
Credit Trend Risk Score
Duration Trend Risk Score
The volatility risk factor is signaling caution for both credit and duration. Specifically, the model is measuring extreme realized and implied volatility in the 10-year U.S. Treasury Note. The 10-year note is an important measure of fixed income risk because it is a sign of investor sentiment about the economy. The current volatility risk score is 50 for both credit and duration, which indicates that we are in a higher risk regime.
Credit Volatility Risk Score
Duration Volatility Risk Score
Credit mean reversion risk, at a score of 25, is elevated, but still below the high risk threshold of 50. These indicators seek to identify divergences in typical fixed income relationships. Right now, the ratio of municipal yields to Treasury yields is at an extreme due to the recent volatility in the U.S. 10-year note. This has potentially created a near-term overbought market condition for municipal debt.
Credit Mean Reversion Risk Score
The duration mean reversion risk remains low with a score of 0.
Duration Mean Reversion Risk Score
To conclude, risks are elevated within the municipal fixed income market. However, risk is not yet high enough to be considered systemic. Therefore, MAAX will continue to take both credit and duration risk in the pursuit of yield. These risks will be monitored closely, and MAAX’s exposures will be adjusted if the risk environment changes materially.
Click here for performance as of the most recent month end.
1 30-day SEC yield for MAAX was 3.19% (unsubsidized 0.26%) as of 8/30/19.
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An investment in the VanEck Vectors Municipal Allocation ETF (MAAX) 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.
An investment in the VanEck Vectors AMT-Free Long Municipal Index ETF (MLN) may be subject to risks which include, among others, municipal securities, credit, interest rate, California, New York, Texas, call, health care bond, transportation bond, water and sewer bond, market, operational, sampling, index tracking, tax, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares and concentration risks, all of which may adversely affect the Fund. Municipal bonds may be less liquid than taxable bonds. There is no guarantee that the Fund's income will be exempt from federal, state or local income taxes, and changes in those tax rates or in alternative minimum tax 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.
An investment in the VanEck Vectors Short High-Yield Municipal Index ETF (SHYD) may be subject to risks which include, among others, municipal securities, credit, interest rate, high yield securities, health care bond, industrial development bond, special tax bond, Illinois, New Jersey, call, private activity bonds, market, operational, sampling, index tracking, tax, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares and concentration risks, all of which may adversely affect the Fund. High-yield municipal bonds are subject to greater risk of loss of income and principal than higher-rated securities, and are likely to be more sensitive to adverse economic changes or individual municipal developments than those of higher-rated securities. Municipal bonds may be less liquid than taxable bonds. A portion of the dividends you receive may be subject to the federal alternative minimum tax (AMT).There is no guarantee that the Fund's income will be exempt from federal, state or local income taxes, and changes in those tax rates or in alternative minimum tax 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.
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 prospectus carefully before investing.