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  • Municipal Bonds

    MAAX Reacts to Inflation Fears

    David Schassler, Portfolio Manager and Head of Portfolio and Quantitative Investment Solutions, VanEck
    July 21, 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 0.72% versus 0.27% for the Bloomberg Barclays Municipal Bond Index in June. Year-to-date, MAAX is up 2.50% versus +1.06% for its benchmark. MAAX’s taxable equivalent 30-Day SEC yield, based on a 37% federal tax rate, was 4.14% as of June 30, 2021.

    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 in June due to falling interest rates and continued economic strength. This allowed high yield (“HY”), with more economic sensitivity, and long-duration investment grade (“IG”), with more interest rate sensitivity, to generate attractive returns.

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

    VanEck Vectors Muni Allocation ETF - June Allocation

    Source: FactSet

    The largest contributor to performance last month was HY, which, in aggregate, returned 1.04%. The second largest contributor to performance was long-term IG with a return of 0.65%. Intermediate-term IG posted a return of 0.36%.

    MAAX’s newly established positions in closed-end bond funds (“CEFs”) were the top performing holdings, with an aggregate return of 1.42%. These positions offer a unique value opportunity within the municipal bond market because we are currently able to purchase them at a discount to their net asset values (“NAV”). This, combined with their embedded leverage, creates a yield of 4.19% on our portfolio of CEFs! However, these positions only contributed modestly to June’s performance because, during the month, on average, they only accounted for 2.44% of the portfolio’s assets. Investors in MAAX should expect us to continue to increase our exposure to CEFs over time.

    The growth fears are currently overwhelming the inflation fears in the market and this is putting considerable downward pressure on the U.S. 10-Year Treasury note. As we write this commentary, on July 7, the yield on the U.S. 10-Year Treasury note reached an alarming low of 1.30% due to fears of slowing economic growth.

    U.S. 10 Year Treasury - 12/31/2020 - 7/7/2021

    U.S. 10 Year Treasury - 12/31/2020 - 7/7/2021

    Source: Bloomberg

    Today, the Fed released its minutes and they showed that several participants emphasized that uncertainty around the economic outlook was elevated and that it was too early to draw firm conclusions about the paths of both the labor market and inflation. The competing risks of low growth and high inflation emphasizes the need for risk management, particularly for duration. Given the current downward trend in interest rates, a 1% yield on the U.S. 10-Year Treasury note, which seemed unfathomable only a few short months ago, may not be too far away. However, if inflation proves to be stickier than most expect, that should send interest rates northbound, and quickly.

    MAAX’s exposures in July remain largely unchanged. The quantitative model that MAAX follows continues to favor both long-duration IG and HY bonds. Therefore, MAAX will continue to benefit from the higher yields by being overweight these assets. In addition, we continue to purchase closed-end bonds funds.

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

    VanEck Vectors Muni Allocation ETF - Return June 2021

    VanEck Vectors Muni Allocation ETF - Return June 2021

    Source: FactSet

    Muni Risks & Positioning

    As of now, MAAX is maintaining its allocation to both long-duration and high yield bonds. The model measures the risk in high yield and long-duration IG to be very low. This is because price trends, in aggregate, are positive, volatility is normalized, and our mean reversion indicators are not at extremes.

    As described above, MAAX continues to allocate a portion of its assets to CEFs due to the yield and valuation advantages. The chart below demonstrates the current month, previous month, and recent shifts in MAAX’s asset allocation.

    VanEck Vectors Muni Allocation ETF - Return June 2021

    VanEck Vectors Muni Allocation ETF - Return June 2021

    Source: FactSet

    To conclude, while our risk scores for both credit and duration remain very low, if there’s anything 2020 taught us, it was that markets can deteriorate very quickly. This is a period of extreme uncertainty, particularly as it relates to growth and inflation—which both have the potential to significantly move interest rates. MAAX’s process is designed to quickly adapt to different market regimes, as it has done in the past.

    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 Portfolio and Quantitative Investment Solutions, VanEck