Strong Demand: Still BullishDavid Schassler, Portfolio Manager and Head of Portfolio and Quantitative Investment Solutions, VanEckSeptember 21, 2020
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 -0.30% vs. -0.47% for its benchmark for the month.
Overall, August was a muted month for performance in the municipal bond market. Depending on duration and credit quality, the returns for the month ranged from modestly positive to modestly negative. MAAX’s top performing positions were in long-duration investment grade and short-duration investment grade. The VanEck Vectors® Short High Yield Muni ETF (SHYD®) returned +0.33% and the VanEck Vectors® Long Muni ETF (MLN®) returned +0.22% (both based on market price). The bottom performing positions were in investment grade intermediate-term and high yield bonds. The VanEck Vectors® Intermediate Muni ETF (ITM®) returned -0.60% and the VanEck Vectors® High Yield Muni ETF (HYD®) returned -0.23% (both based on market price).
The municipal bond market remains challenged, to say the least. COVID-19 has stressed the finances of municipalities as tax revenues are down tremendously as people are making and spending less money. But, regardless of the headwinds, the demand for municipal bonds remains robust as the Municipal Bond Category estimate net flow YTD is $21.8 billion according to Morningstar. Low interest rates have become a necessity to maintain stability in a debt-ridden world. However, that does not erase the needs of citizens who rely on municipal services or the needs of investors to earn a worthwhile after-tax return on their money.
MAAX will continue to seek to balance both the risks and rewards of the asset class. It maintains a 30% allocation to high yield, a 35% allocation to investment grade long duration, a 30% allocation to intermediate-term investment grade and a 5% allocation to short-term high yield. This has helped the strategy generate outperformance over the past few months and recover much of the losses experienced in the beginning of the year.
The next section highlights the risk factors that led to this positioning.
Average Annual Total Returns (%) as of August 31, 2020 1 Mo† YTD† 1 Year Life (05/15/19) MAAX (NAV) -0.30 -2.22 -2.60 0.92 MAAX (Share Price) -0.01 -2.27 -2.58 0.94 Bloomberg Barclays
Municipal Bond Index*
-0.47 3.31 3.24 5.03 Average Annual Total Returns (%) as of June 30, 2020 1 Mo† YTD† 1 Year Life (05/15/19) MAAX (NAV) 1.64 -3.96 -1.63 -0.54 MAAX (Share Price) 1.59 -3.95 -1.47 -0.47 Bloomberg Barclays
Municipal Bond Index*
0.82 2.08 4.45 4.69
†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.
*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 that determines the allocations for MAAX considers this to be a stable risk regime as it relates to the two key risks taken by municipal bond investors: credit and duration. It measures risk via 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. As you can see in the charts below, the risk scores for both credit and duration are 0.
Credit Total Risk Score
Duration Total Risk Score
You will notice that the duration risk score was elevated last month. That is because of increasing correlations between bond yields and equities. This is often a warning sign that trouble may be lurking around the corner. However, that risk has largely abated and never rose to the level of action, whereby we would reduce our duration risk, because the risk levels in the other indicators remained subdued.
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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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