MAAX Reacts to Inflation FearsDavid Schassler, Portfolio Manager and Head of Portfolio and Quantitative Investment Solutions, VanEckJuly 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.
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:
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
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
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
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.
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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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