• What are short-term high yield municipal bonds, and how big is the market?
• What makes short-term high yield municipal bonds attractive relative to other types of bonds?
• Are short-term high yield municipal bonds safer than high yield corporate bonds?
• What makes the SHYD ETF unique?
• How is SHYD’s index constructed?
• Why does the Fund include investment-grade bonds?
• Why does the index cap its exposure to unrated / non-rated bonds?
• Why could slippage be higher in this asset class?
• How does the portfolio management team decide which bonds in the index to hold?
• How can investors buy the VanEck Short High Yield Muni ETF (SHYD)?

What are short-term high yield municipal bonds, and how big is the market?

Short-term high yield municipal bonds are municipal debt securities issued by U.S. states, territories, counties or other local government entities, which carry below-investment-grade credit ratings (or are unrated) and mature in the short-term window (in VanEck’s view: 1-12 years to maturity).

These bonds finance public infrastructure or other municipal projects (general obligation or revenue bonds).

While exact figures for the short-term high yield municipal segment are not always published separately, the broader high yield and non-rated municipal bond market in the United States represents a substantial portion of overall municipal debt outstanding, amounting to hundreds of billions of dollars. This segment has grown over time as municipalities seek alternative funding sources and investors look for higher after-tax income opportunities within the municipal market. VanEck offers exposure to this segment through the VanEck Short High Yield Muni ETF (SHYD).

What makes short-term high yield municipal bonds attractive relative to other types of bonds?

• Potential for higher yields: Compared to investment-grade muni bonds, the below-investment-grade municipal sector typically offers higher interest payments reflecting extra credit risk.
• Tax advantages: Interest from municipal bonds is generally exempt from federal income tax and may also be exempt from state and local taxes (depending on issuer and investor state). This makes the after-tax (or taxable-equivalent) yield of muni bonds especially attractive for higher-tax-bracket investors.
• Shorter duration: Because VanEck Short High Yield Muni ETF (SHYD) focuses on bonds with maturities in the 1 to 12 year range, interest rate exposure (duration risk) is lower than many longer-term bonds (including long-term high yield munis). This can help cushion the portfolio in rising interest-rate environments.
• Diversification: Adding this exposure provides a distinct slice of the muni market, high yield and short maturity, which can complement other fixed income holdings in a portfolio.

Are short-term high yield municipal bonds safer than high yield corporate bonds?

While “safer” is always a relative term and no bond is risk-free, municipal bonds historically tend to experience lower default rates than comparably rated corporate bonds. This difference stems from structural features unique to the municipal market, including the taxing authority of issuers, dedicated revenue streams tied to essential services, and legal provisions that often prioritize debt repayment.

In the short-term high yield municipal segment, those same characteristics apply. However, investors should still be mindful that these securities carry credit risk, potential liquidity constraints, and sensitivity to broader market conditions. Careful issuer evaluation and diversification remain important components of managing risk in this asset class.

What makes the SHYD ETF unique?

• High yield and shorter maturity focus: The index that SHYD tracks comprises municipal bonds with 1-12 year maturities, targeting the high yield short-term tax-exempt bond market.
• Enhanced liquidity / credit-enhancing features: The index includes a component of investment-grade exposure (for example, a portion of BBB and A-rated bonds) and caps on not-rated bonds to improve liquidity and credit profile.
• Lower duration: Because the maturity window is shorter, interest-rate sensitivity is reduced compared to long-term high yield muni strategies.
• Cost efficiency & ETF structure: As an ETF, SHYD offers intraday trading flexibility, transparency and potentially narrower spreads compared with individual bond holdings.

How is SHYD’s index constructed?

The Fund seeks to replicate (before fees and expenses) the performance of the ICE 1-12 Year Broad High Yield Crossover Municipal Index (MIHX), which is intended to track the U.S. dollar-denominated high yield short-term tax-exempt bond market.

Key construction features include:

• Maturity constraint: Bonds are selected with maturities between 1 and 12 years.
• Credit quality / liquidity filters: The index includes allowances for some investment-grade bonds (e.g., up to ~20% BBB or ~10% A) and places a cap on non-rated bonds (e.g., ~25%).
• Sector diversification: The index spans multiple municipal sectors (industrial development revenue, local general obligation, hospitals, education, utilities, etc.).

Why does the Fund include investment-grade bonds?

Although SHYD is focused on high-yield munis, incorporating a modest portion of investment-grade bonds (BBB/A) enhances liquidity and helps reduce tracking error/slippage. Short-term high yield muni bonds can trade less frequently and may be less liquid than investment-grade equivalents; the IG component assists in managing trading costs and replication accuracy.

Why does the index cap its exposure to unrated / non-rated bonds?

Bonds that are not rated by major credit agencies may carry additional risk (credit, valuation, liquidity) and may trade less frequently. By capping exposure to non-rated bonds (e.g., ~25% as per SHYD’s index description), the structure mitigates the potential volatility, illiquidity, and valuation uncertainty associated with that segment of the market.

Why could slippage be higher in this asset class?

Short-term high yield municipal bonds can face the following market constraints:

• Lower issuance and trading frequency: These bonds are issued less frequently and trade less often than larger investment-grade or corporate issues, which can widen bid-ask spreads and increase transaction costs.
• Sensitivity to market stress: Periods of volatility or imbalances in supply and demand can reduce liquidity, making index replication more challenging and amplifying slippage.
• Sampling in portfolio construction: Because high yield muni indices may include hundreds of securities, portfolios often hold only a representative sample, which can lead to tracking differences relative to the index.
• Treatment of defaults in indices: When bonds in an index default, it is typically removed soon after a missed payment or principal event. As a result, index losses may appear smaller than those realized in actual portfolios, where managers must work through the credit event and may face more significant price declines.

How does the portfolio management team decide which bonds in the index to hold?

The Fund uses an optimization process to replicate the index rather than holding every single constituent security. The portfolio management team selects a subset of bonds that reflect the index’s characteristics (credit quality, maturity, sector diversification, yield) while seeking cost-efficient replication. The process aims to balance tracking accuracy, liquidity, transaction costs, and tax considerations.

Source: VanEck.

How can investors buy the VanEck Short High Yield Muni ETF (SHYD)?

You can purchase SHYD just like a stock through your brokerage account or via your financial advisor. It trades intraday on an exchange, offers liquidity similar to other ETFs, and can be added to a fixed income allocation or muni income sleeve.

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