MAAX Seeks Shelter in High QualityDavid Schassler, Portfolio Manager and Head of Portfolio and Quantitative Investment Solutions, VanEckMay 15, 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) returned -0.30% vs. -1.26% for its benchmark for the month.
A significant allure of municipal bond investing, besides the tax preferences, is that default rates have historically been low relative to other fixed income investments. However, the forced shutdown of the economy has led to a severe decline in revenues for state and local governments. The longer the shutdown continues, the more pressure will be applied to municipalities to meet their obligations. Default rates have been rising and, without help from the federal government or a quick resolution to COVID-19, the situation is expected to worsen.
In the beginning of April, MAAX gradually exited its positions in high yield, long and intermediate duration and moved into short duration investment grade. The muni market got off to a bumpy start in April. There was a rapid price decline on the first trading day, followed by a short rally that lasted until April 9, and then prices continued to fall for the rest of the month. Within MAAX’s universe of ETFs, high yield bonds and short-term investment grade were the top performers in April. The VanEck Vectors High Yield Municipal Index ETF (HYD) had a market price return of 5.23% and the VanEck Vectors AMT-Free Short Municipal Index ETF (SMB) had a market price return of 1.35%. The bottom performing ETFs within its investment universe for April were the VanEck Vectors AMT-Free Long Municipal ETF (MLN), with a market price return of -2.85%, and the Vectors AMT-Free Intermediate Municipal ETF (ITM), with a market price return of -2.11%.
The markets have stabilized significantly in the past two months. MAAX is adapting to the lower risk regime by re-investing in investment grade bonds with intermediate and longer-term durations. However, the model remains defensively positioned by avoiding investments in high yield bonds. The following section of the commentary explains why.
Average Annual Total Returns (%) as of April 30, 2020 1 Mo† YTD† 1 Year Life (05/15/19) MAAX (NAV) -0.30 -9.30 - -6.13 MAAX (Share Price) -1.92 -9.92 - -6.70 Bloomberg Barclays
Municipal Bond Index*
-1.26 -1.88 2.16 1.21
Average Annual Total Returns (%) as of March 31, 2020 1 Mo† YTD† 1 Year Life (05/15/19) MAAX (NAV) -12.09 -9.03 - -5.85 MAAX (Share Price) -11.18 -8.15 - -4.87 Bloomberg Barclays
Municipal Bond Index*
-3.63 -0.63 3.85 2.50
† 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.
* 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.
Muni Risk Factors
The model indicates a period of continued high 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 of 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 remains at 100. This extreme score reflects falling prices, high volatility and various fixed income spread measures that indicate a period of near-term instability in assets with credit risk.
Credit Total Risk Score
The duration risk score fell from 66 to 41 as the markets continue to stabilize.
Duration Total Risk Score
The volatility of key global interest rate benchmarks has fallen as central banks around the world aggressively combat the economic turmoil caused by the virus. This was the catalyst for MAAX re-investing in both intermediate and longer-term duration investment grade bonds. While the duration risk score is below the critical level of 50, it remains elevated due to continued downward pricing pressure on municipal bonds with longer durations.
This is a period of great uncertainty for the markets. Risk may continue to abate and offer investors a great buying opportunity in high yield, or it may worsen and high yield prices may fall further from here. We believe that the fund is positioned to perform well in either scenario.
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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.
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