Skip directly to Accessibility Notice
  • Municipal Bonds

    Lower Yields and Potential for Increased Taxes Propel MAAX Higher

    David Schassler, Portfolio Manager and Head of Quantitative Investment Solutions
    August 18, 2021
     

    The VanEck Vectors® Muni 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® Muni Allocation ETF (“MAAX”) had a NAV total return of 0.81% versus 0.83% for the Bloomberg Barclays Municipal Bond Index in July. Over the past 12 months, MAAX is up 5.69% versus 3.29% for its benchmark. MAAX’s taxable equivalent 30-Day SEC yield, based on a 37% federal tax rate, was 4.19% as of July 31, 2021.

    Month-End
    Average Annual Total Returns (%) as of July 31, 2021
      1 Mo YTD 1 Yr Life
    (05/15/19)
    MAAX (NAV) 0.81 3.33 5.69 3.23
    MAAX (Share Price) 0.72 3.39 6.06 3.27
    Bloomberg Barclays
    Municipal Bond Index*
    0.83 1.90 3.29 4.47

    Quarter-End
    Average Annual Total Returns (%) as of June 30, 2021
      1 Mo YTD 1 Yr Life
    (05/15/19)
    MAAX (NAV) 0.72 2.50 7.06 2.97
    MAAX (Share Price) 0.87 2.66 7.16 3.05
    Bloomberg Barclays
    Municipal Bond Index*
    0.27 1.06 4.17 4.44

    Returns less than a year are not annualized.

    Expenses: Gross 0.35%; Net 0.35%. 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.

    The "Net Asset Value" (NAV) of a VanEck Vectors Exchange Traded Fund (ETF) 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.

    The municipal fixed income markets performed strongly last month due, primarily, to falling interest rates and strong demand for tax-exempt income. Lower interest rates increased the demand for securities with higher yields, which was likely the driving force behind the strong price appreciation in closed-end bond funds (“CEFs”). As we have mentioned in previous commentaries, many municipal CEFs offer very attractive yields compared to more traditional municipal bond investments and other taxable yield generating investment solutions. Additionally, the government is spending a lot of money to support the economy, and President Biden plans on paying for some of that spending with higher taxes on the wealthy, which also increases the attractiveness of municipal bonds.

    MAAX’s top performing positions were in closed-end bonds funds, which returned 2.28%, and intermediate-term investment grade, which returned 0.74%. MAAX’s other positions also performed well during the month, with its exposure to high yield bonds returning 0.69% and its exposure to long-duration bonds returning 0.68%.

    Below is the strategy’s average asset allocation mix in July:

    VanEck Vectors Muni Allocation ETF - July Allocation

    VanEck Vectors Muni Allocation ETF - July Allocation

    Source: Factset

    MAAX continued to purchase CEFs in July. The position is now approximately 10% and continues to be funded by reducing exposure to long-duration bonds. The quantitative model that MAAX follows continues to have an optimistic outlook on the municipal bond market. Therefore, we will remain overweight both long-duration and high yield bonds in an effort to generate higher than benchmark yields.

    The chart below illustrates the performance and contribution to performance for each segment of the portfolio:

    VanEck Vectors Muni Allocation ETF - Return July 2021

    VanEck Vectors Muni Allocation ETF - Return July 2021

    Source: Factset

    Muni Risks & Positioning

    As of now, MAAX is maintaining its allocation to both long-duration and high yield bonds in an effort to generate higher than benchmark yields. The model measures the risk in high yield and long-duration to be low due to positive price trends, normalized volatility, tight credit spreads, and an overall stable risk regime.

    The chart below demonstrates that MAAX is maintaining approximately 65% of its exposure in investment grade and approximately 35% in high yield. We continue to re-allocate capital from long-duration bond exposure to CEFs due to the yield advantages.

    VanEck Vectors Muni Allocation ETF - Allocation Shifts

    VanEck Vectors Muni Allocation ETF - Allocation Shifts

    In summary, MAAX continues to benefit from the stability in the municipal bond market. This has allowed MAAX to outperform by a strong margin, primarily through seeking out higher yields, over the past 12 months. Based on the current risk signals, we expect that this market will remain steady in the near-term. However, there are a lot of uncertainties in the market as it relates to both growth and inflation that have the potential to unsettle this period of low volatility. If the current dynamics change, we believe that MAAX’s investment process is well positioned to quickly and appropriately adjust its positioning.

    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.

  • Authored by

    David Schassler
    Portfolio Manager and Head of Quantitative Investment Solutions