Chicago. Detroit. Puerto Rico. Increasingly precarious financial positions in those cities and territories and others across the U.S. have cast a pall over the municipal bond market.
The cases of Chicago, Detroit and other cities across the U.S., including several mid-sized cities in California, underscore the pressure public pensions and post-employment benefits, such as healthcare for public workers, are putting on state and municipal finances. Those weakening financial positions are prompting advisors and investors to consider alternatives to general obligation bonds when building out the municipal section of fixed income portfolios.
There is an exchange traded fund for that and that fund is the Deutsche X-Trackers Municipal Infrastructure Revenue Bond Fund (NYSEArca: RVNU). RVNU seeks to limit or reduce exposure to public pension risk, not avoid or eliminate it, by focusing solely on bonds that fund, state and local infrastructure projects such as water and sewer systems, public power systems, toll roads, bridges, tunnels, and many other public use projects where the interest and principal repayments are generated from dedicated revenue sources. [More Unique ETF Sources of Yield]
Toll roads, tunnels and water systems may not sound like the sexiest investment themes, but with public pension issues afflicting states from New Jersey to Pennsylvania to California, revenue bonds, including those held by RVNU, can be seen as the “new black” of the municipal bond market.
“RVNU allows us to offer a product that focuses on investment-grade revenue bonds,” said Deutsche Asset & Wealth Management (Deutsche AWM) Portfolio Manager Blair Ridley in an interview with ETF Trends. “We focus on revenue issuers that by that heir nature usually carry less pension risk as compared to general obligation issuers. We’re trying to follow those issues with dedicated revenue streams, or ‘essential purpose bonds. In any economic environment, people will pay their electric bill and their water bill.”
RVNU’s index is intended to track federal tax-exempt municipal bonds that have been issued with the intention of funding, state and local infrastructure projects such as water and sewer systems, public power systems, toll roads, bridges, tunnels, and many other public use projects. The index will attempt to only hold those bonds issued by state and local municipalities where the interest and principal repayments are generated from dedicated revenue sources. [Muni Credit Risk Remains Muted]
A succinct way of highlighting RVNU’s utility in the current municipal bond market environment comes courtesy of Deutsche AWM portfolio manager Ashton Goodfield. She said, “RVNU has less exposure to headline risk. The revenue streams are more stable in up and down economic environments. These revenue streams are what pays back principal and interest on the bonds.”
RVNU is just over two years old holds 44 bonds. The ETF’s underlying index, the DBIQ Municipal Infrastructure Revenue Bond Index, holds over 800 bonds. As Ridley notes, RVNU has “a lot of room to add holdings.” RVNU employs a representative sampling methodology in order to match the traits and returns of its underlying index.
RVNU has the flexibility to go as far down the ratings spectrum as BBB, but bonds rated either AA or A currently comprise over 86% of RVNU’s index, according to issuer data.