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  • Municipal Bonds

    MAAX Diversifies into Closed-End Funds

    David Schassler, Portfolio Manager and Head of Portfolio and Quantitative Investment Solutions, VanEck
    June 23, 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 0.77% versus 0.30% for the Bloomberg Barclays Municipal Bond Index. Year-to-date, MAAX is up 1.77% versus 0.78% for its benchmark. MAAX’s taxable equivalent 30-Day SEC yield, based on a 37% federal tax rate, was 4.21% as of May 31, 2021.

    Last month, the top performing position was long-duration investment grade (“IG”), with a return of 1.02%, followed by high yield (“HY”), with a return of 0.97%. Typically, long-duration bonds benefit from falling interest rates. The yield of the U.S. 10-Year Treasury note ended May at 1.59%.

    In June, MAAX continued to be overweight both credit and duration risk relative to the benchmark based on the risk model (see below). MAAX began purchasing closed-end municipal bond funds in an effort to improve both the yield and diversification of the strategy. As of the date of this commentary, MAAX held two closed-end municipal bond funds, the DWS Municipal Income Trust and the Eaton Vance Municipal Bond Fund.

    Treasury yields are at near historical lows, yet we are currently experiencing high inflation. High inflation hurts fixed income investors by reducing the value of both their principal and interest, and, if or when interest rates finally do rise, it will put additional downward pressure on the value of these bonds.

    The latest U.S. inflation report was released on June 10 and was hotter than anticipated. The Consumer Price Index (CPI) for the past 12-months is now 5%. The bond market reacted to higher than expected inflation by sending the 10-year Treasury note yield to 1.43%. At no point in history have we had inflation this high and yields this low.

    Historically High Inflation and Low Yields

    Historically High Inflation and Low Yields

    Source: Bloomberg

    This should make duration management top of mind for fixed income investors. We believe that MAAX is well situated to navigate this environment because it has the ability to reduce duration risk if interest rates do surge higher. Additionally, MAAX is earning a higher yield than its benchmark, which is another tool to combat inflation.

    Below was the strategy’s average asset allocation mix in May:

    VanEck Vectors Muni Allocation ETF — May 2021 Allocation

    VanEck Vectors Muni Allocation ETF - May Allocation

    Source: VanEck, FactSet

    Last month, long-duration IG bonds were the top performer and largest contributor to performance, followed by HY:

    VanEck Vectors Muni Allocation ETF — Return May 2021

    VanEck Vectors Muni Allocation ETF - Return May 2021

    Source: VanEck, FactSet

    High yield bonds continued to perform well because of their economic sensitivity, the flurry of positive economic data points and the positive economic outlook of the markets. The chart below demonstrates that, as expected, within high yield, longer-duration bonds outperformed shorter-duration bonds.

    VanEck Vectors Muni Allocation ETF — Return May 2021

    VanEck Vectors Muni Allocation ETF - Return May 2021

    Source: VanEck, FactSet


    Average Annual Total Returns (%) as of May 31, 2021
      1 Mo YTD 1 Yr Life
    (05/15/19)
    MAAX (NAV) 0.77 1.77 8.05 2.73
    MAAX (Share Price) 0.77 1.77 7.93 2.74
    Bloomberg Barclays
    Municipal Bond Index*
    0.30 0.78 4.74 4.48
    Average Annual Total Returns (%) as of March 31, 2021
      1 Mo YTD 1 Yr Life
    (05/15/19)
    MAAX (NAV) 0.74 -0.11 10.15 1.96
    MAAX (Share Price) 0.66 -0.32 8.81 1.85
    Bloomberg Barclays
    Municipal Bond Index*
    0.62 -0.35 5.51 4.25

    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.

    Muni Risk Factors

    As of now, MAAX is maintaining its allocation to both long-duration and high yield bonds. The model measures the risk in high yield, with a risk score of 0, to be low. The duration risk was reduced from 33 on the beginning of May to 7 in June.

    Duration Total Risk Score

    Duration Total Risk Score

    The duration risk score declined due to price momentum. As of the end of May, our composite of key interest rates was still trending upwards. This indicated that, overall, we were still in a rising rate regime. However, this risk has since abated because the trends yields in the U.S. and Canada are no longer rising.

    Duration Trend Risk Score

    Duration Trend Risk Score

    The duration risk score has increased slightly from 0 to 16 due to an increase in the correlation between the U.S. dollar and the yield of the 10-Year U.S. Treasury note. By itself, this is not very important, but it may be an indication of potential market stress on the horizon. We will continue to monitor this closely.

    Duration Mean Reversion Risk Score

    Duration Mean Reversion Risk Score

    The chart below illustrates the current, previous months and recent shifts in MAAX’s asset allocation. Long-term IG exposures were reduced by 1% and re-allocated to closed-end funds.

    VanEck Vectors Muni Allocation ETF May Allocation

    VanEck Vectors Muni Allocation ETF May Allocation

    The low interest rate regime continues to create headwinds for fixed income investors. The threat of higher inflation only compounds those risks. MAAX will continue to seek to outperform its benchmark through both its higher yield and ability to adjust its exposures as the risks in the market change.

    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